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Tech M&A Adjusts to a New Normal

In an uncertain climate, middle-market buyers and sellers begin to get back to business

Tech M&A Adjusts to a New Normal

While an economic slowdown has been weighing on M&A for close to a year now, several negative events in the tech sector in recent months have made the future even more uncertain for companies in this area.

Some big tech companies like Google, Amazon, Microsoft and Zoom have been laying off thousands of workers—due to a confluence of factors including higher interest rates, inflation and a perhaps inevitable reversal following pandemic hiring sprees. Meanwhile, the collapse of Silicon Valley Bank and a pullback by venture capitalist investors have made things more difficult for smaller companies and startups.

This section of the report originally appeared in the Summer 2023 edition of Middle Market Executive.

Illustration by Matt Chinworth.

Just like the rest of the market, the middle-market tech sector is reeling from the roller-coaster ride of the last few years.

Compared with early 2022, the beginning of 2023 has been quiet on the deal front. The number of middle-market tech deals in January 2023 was just 11, compared with 48 in January 2022, according to Refinitiv. While some industry-watchers say things are starting to pick up, few expect a return to 2021 and early 2022 levels. “It’s no surprise that dealmaking has slowed considerably,” says Justin Loeb, director at Clearsight Advisors, a subsidiary of Regions Financial Corporation. “Interest rates have increased and the cost of capital across the board is more expensive, which makes it more difficult to do a traditional leveraged buyout.”

Still, tech investors, companies and advisors are finding ways to transact, focusing on due diligence and picking bright spots in the sector. Strategic investors, in particular, are in a stronger position to do deals when they can finance them with cash and without debt financing, which is harder to come by in the current market environment.

Strategic investors are in a stronger position to do deals when they can finance them with cash.

Strategic Interest

Several sources say they’ve seen increased interest from strategic buyers in sale processes. “It’s true that stock prices have been depressed and boards may be hesitant, but many companies still have plenty of cash on their balance sheet and want to buy growth,” says Pete Dalrymple, managing director and co-head of technology investment banking at William Blair. “Strategics are playing a much longer game than most PE investors—they think of the world in a 10- to 25-year time horizon and can make longer term bets.”

In June 2022, William Blair advised Brightly Software, a leader in cloud-based asset and maintenance management software, in its sale to Siemens, a publicly traded German engineering company. “Siemens was able to pay a market-clearing price for a highly strategic software company that will transform Siemens’ profile for the next 30 years,” says Dalrymple. Siemens purchased the company for $1.58 billion, according to a press release from Brightly Software.

“We’ve seen a resurgence in corporate acquirer M&A from large strategics,” notes Loeb. “Many of them are viewing uncertainty as a reason to find some ‘deals’ from a value perspective. Most of the strategics we work with in the knowledge economy can use cash on-hand or an existing debt facility to finance a deal. In 2021 and 2022, private equity platforms dominated the deal closures. Now it seems like many clients are getting the strongest looks from strategics or are being assessed as add-ons to existing PE platforms.”

In February 2023, Clearsight advised digital and data engineering company Hexacta in its sale to GlobalLogic, as well as life sciences consulting firm Bionest Partners in its sale to Accenture. In November 2022, Clearsight advised digital transformation consultancy AustinCSI in its sale to Cognizant.

Related content: PE Sponsors and Strategics Get Proactive to Compete

For private equity investors, focusing on add-ons is a similarly reliable way to add value to their existing portfolio companies in the current environment. “In a climate with uncertainty, we’re trying to be thoughtful and intentional about using the lever of M&A within our portfolio,” says EJ Whelan, managing director at private equity firm Berkshire Partners. “We’ve always been acquisitive, but today this is an even more prevalent approach. We can be opportunistic when valuation expectations align—if there are companies that have been burning money and hitting a wall, there may be opportunities to bring them into our platforms and really make 1+1=3 or 4.” For example, Berkshire invested in Tango, a leading provider of cloud-based store lifecycle management and integrated workplace management software, as a platform company in 2021. Within six weeks of that investment, in January 2022, Tango acquired AgilQuest, the leader in flexible and hybrid workplace scheduling.

A Focus on Due Diligence

In a riskier environment, due diligence takes on added importance for investors of all stripes. “Whether you’re a strategic or private equity buyer you want to make sure that if you get a deal done, you’ve done all the requisite diligence because this can be a tricky market environment and you don’t want to end up with surprises after the fact,” says Dalrymple.

Cybersecurity is one area of focus. “We are seeing a rapid rise in cybersecurity threats, resulting in an increased number of breaches that carry monumental costs for organizations.

It has become critical for an acquirer to assess the target’s cybersecurity posture across multiple threat vectors and level of cybersecurity program maturity,” notes Vik Sharma, managing director at William Blair. Accordingly, there has been a greater emphasis on tech diligence as it relates to security and breaches.

“If there’s a hack or another problem, the whole company can go down. It’s important to be proactive rather than reactive when it comes to cybersecurity in today’s environment,” says Shawn Flynn, principal at investment bank Global Capital Markets.

It’s important to be proactive rather than reactive when it comes to cybersecurity in today’s environment.

Shawn Flynn

Global Capital Markets

Investors are also spending more time digging into organizational charts during due diligence, says Flynn. “Who was hired pre-pandemic, who was hired during the pandemic, how many workers were and are remote? What does the culture look like and how cohesive are the employees?” he adds. “There’s a worry that emotional bonds are not as strong as they were pre-COVID and that employees won’t stay on after a transaction as a result.”

Sales pipelines are another area of focus for potential buyers in the tech space. “In an environment where no one is sure whether we’re in or possibly going into a recession, buyers are scrubbing sales pipelines far more rigorously than in the past,” says Dalrymple. “Buyers are saying, ‘If you want us to pay a market clearing price, that’s fine, but with headwinds we need to make sure the business is going to hit its numbers.’ That means looking at sales projections, lead quality, historical budget trends and the quality of the company’s sales management teams to ensure the numbers will be delivered on.”

Valuation Expectations

Most buyers are increasingly aware that macroeconomic conditions can always get worse. Where valuations are lower, some of it is due to buyers giving less weight to sellers’ projected numbers. “It’s become harder to get credit for 2023 full-year revenue or EBITDA multiples. Instead, buyers are making valuations based on LTM (last 12 months) and 2022. This differs from two years ago, when many buyers gave some credit for fullyear numbers despite being only partially through the year,” says Loeb.

Buyer and seller valuation expectations are still leveling out as the market adjusts to a new normal. “When there’s a market slowdown, it hits the folks that are valuing companies first—the buyers—and then the sellers,” says Loeb. Many sellers are basing valuation expectations on the bull market of 2021, while investors are factoring in the increasing cost of capital and greater risk in today’s environment.

That said, there are signs this gulf is narrowing. “Last year, we were seeing wide gaps between buyer and seller expectations,” says Phil Meicler, a partner at Bain Capital Tech Opportunities, which closed its second fund in February with $2.4 billion. “There were a decent number of businesses who came out to test the market, but few transactions came to fruition. Now, we’re seeing more sellers willing to ratchet back expectations. The gap has not eroded entirely, but it feels like it’s starting to narrow a little more.” In April, Bain Capital Tech Opportunities announced a minority investment in AI-enabled knowledge work platform iManage.

Related content: Bridging the Valuation Gap

Some companies that are in an attractive subsector or performing well despite the odds are still managing to score high valuations. For example, Clearsight recently represented multiple sell-side mandates in the pharma services and digital transformation services end markets that sold for high teens to more than 20x EBITDA, depending on the transaction. “Those are right in the range we would have expected in 2021,” says Loeb.

Opportunities in Select Sectors

Though there’s a lot of caution among dealmakers, today’s market may provide opportunities for the right types of businesses, especially given the amount of dry powder still available.

“If you’re a business that’s performing well in a high-growth tech-enabled industry, either founder-owned or PE-backed, then everyone is paying attention,” says Loeb. He points to pharma services, digital transformation services and office of the CFO software as examples of sectors where valuations have held steady.

While the first couple months of the year were slower, some M&A professionals have seen dealmaking begin to pick up at the start of Q2 2023. “There is certainly a lot of pent-up demand. It was a slower start to the year. We had a lot of great companies waiting in the wings, but now it feels like it’s time to come up for air,” says William Blair’s Dalrymple. At the time of writing in April, the firm had signed nine deals over the last six weeks across different pockets of technology, including advising Five Arrows, the alternative assets arm of Rothschild & Co., on its acquisition of special education software n2y.

Looking Forward

For investors, driving profitability in current portfolio companies is key, particularly given rising interest rates. A tighter job market and layoffs from big tech provide opportunities for smaller companies to pick up and retain great talent. “We have companies that are profitable with strong balance sheets. The softening of the job market is an opportunity for us to incorporate talent into our organizations that may be available and was not before,” says Meicler.

The down-market also translates to a challenging fundraising environment for investors. In such a climate, however, “investors need to put points on the board. In order to raise new funds, they need to buy or sell companies,” notes Dalrymple.

This, in addition to the sizable stores of private equity dry powder, means that deals will still get done.

“At this point, technology is never going away,” says Dalrymple. “It’s absolutely critical to the way we live our lives and the way the global economy functions.”


Meghan Daniels is a freelance writer and editor based in Brooklyn, New York.


Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.