Top 5 Predictions for M&A in the Technology Service Provider Industry

Well, to say that 2020 was an interesting year is an understatement!  After closing five M&A transactions for technology services providers of all sizes during COVID, I can truly say that the technology sector slowed down but only for a brief couple of months. Deals continued, albeit with a longer due-diligence period and with more scrutiny on forward-looking projections and customer satisfaction metrics. But deals closed, earnout periods did NOT extend, nor did valuations decrease. All good signs for channel partners in general. The digital transformation everyone “talked” about, became a reality in such a short period of time. And, most technology providers were there to transform to whatever extent their customer base needed.

2021 will prove to be another interesting year as many channel partners who sat out 2020 may be ready to either buy or sell. Based upon the transactions I closed in 2020, and the trends I am seeing, here are my top 5 M&A predictions for technology services providers in 2021:

1. Acquisitions will continue to come down-market. This means companies who are less than $10M, $5M or even $3M will get noticed like they never have before. There seems to be safety in smaller tuck-in acquisitions. Yes, getting the bigger deals done is important too but strategic buyers are playing a more conservative game–and so is Private Equity–with tuck-in acquisitions to larger portfolio companies at an all-time high. (Source – Pitchbook, June 2020)
2. Private Equity (PE) backed companies (Strategic buyers, backed by PE) will outpace all other buyers in 2021. In part, because they have the money to spend, and in part because they can clearly see who has a sustainable business during these difficult times. Don’t be surprised if the volume of calls from PE firms increases. They are on the hunt and looking hard to spend money in industries like technology that are still growing in spite of the pandemic. (Be sure to download my PDF, What to do When Private Equity Calls)
3. More sellers will come to market in 2021. I believe this is for two reasons: First, many sellers took PPP loans and now want to apply for forgiveness so they can get the debt off their books. And who wants to escrow those proceeds until they are forgiven, right?  Once their loans have been forgiven, and revenue is restored, it’s time to get down to the business of selling. Secondly, the pandemic put many sellers’ plans for going out to the market on hold. And CEO’s are ready to move forward with their future plans, whether that be to remain and work through the earn-out or to move into retirement.
4. Foreign investors continue to see the U.S. as a safe place to invest. I was surprised at the amount of money flowing in from Europe and Asia this year (even on small deals) and I think that will only continue in 2021. Regardless of your political view, the US still seems to be doing well with a stock market reaching all-time-highs at the end of 2020.  I also believe that foreign investors pay more than U.S. investors, but that is just based upon personal experience.  
5. An increase in “recurring” revenue trumps generic revenue increases. It is the companies that had a strong recurring or repeat customer base that received the better valuations in 2020, and that is not going to change in 2021. The pandemic really proved the value of contractual revenue or revenue that maintained itself during 2020. I will go as far as saying that valuations will increase even more for companies who did not see a drop in revenue in 2020 due to recurring clients.

Ok, here is a bonus prediction….. Regardless of the vaccines that will be become available this year, I believe large mega (international) conferences are dead for the near future. Few people I know want to be around thousands of people anymore converging together in large venues. I think many of us are looking forward to finally getting back to conferences, seeing colleagues and presenting in person, but I believe technology providers will opt for the smaller more intimate (in person) technology focused conferences, whenever they begin again, where there is less of a likelihood of contracting some unknown strain of whatever is floating out there in the world.

Let’s stay connected in 2021 and see how I fared with my predictions. Have a great year, and maybe I will see you at a conference again soon!