What are the most significant changes to M&A and M&A processes due to COVID-19?

The move to all-digital deal negotiations and M&A processes stands out.

During COVID-19 here in Australia, most deals have been completed 100% virtually, which we have never seen before and did not think possible. In the past, deal processes would include management-level individuals and their advisers on both buy-side and sell-side meeting in person. Today, all in-depth discussions, including M&A deal structuring, happen online.

The resulting changes have led to speedier deal completions. For example, we have worked on a technology deal where the entire M&A process took seven weeks. In the past, that deal would have taken a minimum of six months. One reason for the increased speed is technology-enabled flexibility. Suppose we identify issues during an M&A process, such as details regarding tax or finances. In this situation, we can quickly set up a short Microsoft Teams or Zoom meeting and address deal details in minutes. Before, that process might have involved the parties setting up an in-person meeting with the associated scheduling issues and delays.

For Australia, one of the consequences is that we see increased international investor interest. With digital M&A processes, geographic distances mean less, which adds to the attractiveness of our rich investment environment and technology ecosystem.

 

What new M&A-related challenges and opportunities face technology companies and investors?

Australian technology companies may have new investment options, apart from increased interest from traditional investors like VCs and private equity firms. Family Offices is an example of this trend. In many ways, it is currently a sellers’ market, and company management teams looking to raise growth capital or an exit have many opportunities to consider. Furthermore, the market for many technology sub-industries is growing rapidly.

Grasping the new opportunities necessitates moving and growing at speed, which is both an opportunity and a challenge.

Data has become even more important during deal processes. In an age of digital deals, companies looking for investment must know how to structure and prepare data. In addition, investors are asking for increasingly granular data compatible with their internal data analysis systems. In other words, companies are challenged by a need to make more and more data ‘edible’ for potential investors.

COVID-19 has also changed the risk landscape for investors and companies. Increased market uncertainties create a need to update risk metrics and financial projections and include varying future scenarios for each in valuation and deal structuring processes.

 

What are some of the biggest impacts on the financial, audit and tax aspects of technology deals?

Financial and market projection uncertainty has led to an increased focus on earnouts and deferred payment structures. The aim is to provide flexibility for risk prediction for the investor and upside value for the seller. In addition, management retention has become increasingly important for all types of investors, including trade buyers, as the need to ensure a smooth transition without the loss of key management, customers and ultimately revenue is critical.

Due diligence and financial analysis models must incorporate heightened uncertainty. Furthermore, current and future tax exposure may be subject to change as countries adapt to a post-COVID reality and the likely introduction of OECD-led tax schemes covering the digital economy. There may also be the prospect of retrospective audits, as technologies companies in some geographic areas may be asked to document and validate their participation in COVID-related support schemes.

Overall, there is an increased need for creativity to address novel risk elements in the deal process and subsequent collaborations. Here, it has been very interesting to follow how investors and sellers have focused on finding strong common ground; at times, over securing a ‘solo win’ by getting the best financial result for one of the parties.

 

What do you think the future of Technology M&A – and M&A processes – looks like?

In the short to medium term, there is little doubt that technology M&A will remain busy. New investment vehicles and the amount of dry powder available to VCs and PE firms create options for technology companies to pursue growth capital or an exit in a hot market.

Simultaneously, COVID-19 has been a time where many decision-makers in companies and interment firms have had time to take stock and formulate or realign growth strategies. This is a driver behind substantial changes to M&A deals, such as the closer collaboration between buyers and sellers.

Whether these trends are long-term, permanent changes is difficult to predict.

However, my view is that some changes are here to stay. One is that digital deal-making will remain the cornerstone of M&A. As a result, the increased focus on data – both historical and current – will increase. Using data to tell your growth story and underscore your future potential will be incredibly important for any technology company. This will include detailed financial data covering every aspect of the business.

The next steps will likely increase the use of digital solutions on both sides of the negotiation table. Investors are already integrating the likes of AI in their deal scoping and company analysis setups. It is a trend I see gathering momentum in the coming years. On the sell-side, technologies like VR may lead to offering virtual company tours to potential investors.

There is a sense that the technology industry and investors have both made it their new year’s resolution not to accept the status quo. That is driving many exciting changes – some of which are still emerging.