CFOtech New Zealand - Technology news for CFOs & financial decision-makers
Story image
Competitive risk key to high acquisition values for tech companies
Thu, 26th Oct 2023

Well-established tech companies that craft compelling narratives, leverage strategic sale timing and maximise success through commercial relationships can achieve premium M&A values, according to Lee Chin Jian, Vice President at DAI Magister.

The tech M&A ecosystem is not exclusive to startups and tech superpowers – established companies can still pursue M&A as a viable and profitable exit strategy. For example Splunk, the AI-powered cybersecurity and observability company established in 2003, was recently acquired by Cisco in a $28 billion deal. Similarly, last month Adobe acquired Figma, a leading web-first collaborative design platform, for approximately $20 billion.

According to Lee, acquisitions such as these occur when revenue-stable targets are strategically positioned within the same technological niche as the buyer. As a result, they pose a credible threat to the acquirer, who is often willing to pay a premium to neutralise this competitive risk.

“Synergistic acquisitions often stem from terminal risk, when a smaller (in relative terms) organisation emerges as a formidable competitor to a tech giant," says Lee.

"Deals of this nature not only eliminate competitive risk for the acquirer but also add innovative and cutting-edge features to their offering, helping the company capitalise on industry trends and unlock new customers seeking enhanced functionality," he says.

"Therefore, an important thing for revenue-stable targets to consider is commercial relationships with potential acquirers, which will boost their chances of a successful acquisition."

Lee says the first step for well-established tech companies seeking an M&A exit is to identify desirable acquirers and internal champions within these counterparties, and then make deliberate inroads with them. 

"Once a handful of potential acquirers have been narrowed down, target companies can reinforce competitive tension via corporate marketing and provide them with a detailed synergies analysis," he says.

“Assessing the right time for target companies to sell is crucial. The ideal timing is when multiple acquirers are already vetting the target rather than when targets perform outreach to seek potential buyers, demonstrating the pre-existing demand for a company which can drive up the price."

From a financial perspective, Lee says the timing of when a company should consider going to market for a sale hinges on its revenue status. 

"For companies in the pre-revenue stage, it is prudent to highlight the intrinsic value of their intellectual property. In such cases, it makes strategic sense to initiate the selling process," he says.

“However, for companies with minimal revenues, caution should prevail. Going to market at this juncture risks attaching a low valuation multiple to the modest revenue figures achieved. Waiting until revenues reach a level of commercial significance materially enhances the prospects of securing a higher valuation, thus maximising the potential return on the sale."

Lee says growing tech companies with stable revenues need to craft a compelling narrative to render them irresistible to potential acquirers.

"They can leverage their unique strengths to secure premium valuations, whether that’s by becoming a competitive threat or through establishing strong commercial relationships.”