The valuation of global acquired technology companies fell for the second consecutive year in 2023, almost half lower compared to the pandemic peak in 2021, according to the latest report by consulting firm Bain & Company. This market correction was due to persistently high-interest rates, macroeconomic uncertainty, and regulatory restrictions.
Bain & Company estimates show that the average purchase price of a tech company reached a value corresponding to 13 times its EBITDA profit in 2023. In 2022, investors paid an average of 15 times profit and a year earlier as much as 25 times profit. Despite a sharp decline, 64% of tech sector representatives believe that there is still a gap in expectations regarding the price sellers would like to get for the company, and the amount buyers are willing to pay.
– The main reason for the weakness in mergers and acquisitions in the tech sector is the gap between sellers and buyers’ price expectations. Although valuations have fallen recently, investors are still not convinced about transactions mainly due to uncertain market development prospects and the high cost of capital. Sellers, on the other hand, want to wait for the situation to improve and valuations to rise – says Paweł Szreder, a partner at Bain & Company.
Last year turned out to be the weakest for the M&A market since 2013. The total value of transactions worldwide fell by 15% year on year to $3.2 trillion. This figure is half a trillion dollars lower than the 2022 result and $2.8 trillion lower than the previous record in 2021. The largest decline in transaction value concerned those involving private equity and venture capital funds, dropping by a staggering 37%. By comparison, the total transaction value involving strategic investors fell by 6% year on year.
– History shows that it is primarily market uncertainty, not recession, that slows M&A activity. We expect competition for valuable assets to intensify this year, as market uncertainty should decrease. With the expected interest rate cuts, private equity funds and corporations, which have recently been cautious about transactions, will reactivate – adds Paweł Szreder. – Interesting companies may appear on the market, for example, those that do not fit into corporations’ long-term development strategies or those that have been in portfolio funds for too long.
In the tech sector, the value of transactions involving strategic investors fell by 43% year on year worldwide. In Poland, this sector is still quite small, and its value is influenced by individual transactions. Last year’s purchase of stakes in gaming tech company Techland by Chinese conglomerate Tencent Holdings meant that, contrary to the global trend, the total value of transactions in the modern technology sector in Poland increased.
– Companies deciding to make acquisitions in the still uncertain market environment must pay even more attention to the realization of assumed synergies. According to our research, in many cases, revenue synergies turn out to be lower than expected, and the most common cause is insufficient integration of the product portfolio and the customer reach model – asserts Paweł Szreder. – In the coming months, tech firms should increase their M&A market activity, taking advantage of a period of less competition from private equity investors. They should act boldly, proactively initiating transaction processes, accurately identifying and quantifying synergies in the due diligence process, and proceeding to their realization immediately after the transaction closes.
The full report on the global mergers and acquisitions market is available at:
https://www.bain.com/insights/topics/m-and-a-report/
