Pandemic accelerates the Digital Economy

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The emergence of the Novel Coronavirus (“C19”), and its subsequent global spread, has had profound effects on public health, social and economic policy, as well as global macroeconomic performance. The pandemic has also triggered dramatic increases in technology investment and accelerated digital transformation, acting as a catalyst in the inevitable long-term transition to a Digital Economy.

C19’s significant impact on demand in sectors such as travel, hospitality, retail and automotive has resulted in reduced revenues and extensive cost restructuring. By contrast, C19 has at the same time spurred technology adoption. Indeed, the importance of the Digital Economy has been further demonstrated in recent months via its ability to support companies to continue their operations, purchase and deliver critical goods and services (including the crucially important healthcare sector) and secure employment for those able to work remotely. This has accelerated the growth and increased the valuations of companies active in the Digital Economy, with Apple becoming , in August 2020, the first company in history to reach a $2 trillion market capitalisation.

Between January and September 2020, in the face of the pandemic, M&A activity has continued at a rapid pace:

  • 58 sizable $100m+ Digital Economy deals completed in Europe
  • $61 billion aggregate value for these Digital Economy deals in Europe
  • 15 large deals worth over $1 billion, totalling $50 billion in aggregate value
  • 46% software share of deal value up from 32% in 2019
  • 28% financial sponsor share of deal volume
    remaining stable
  • 15% decline in deal volume for sizable $100m+ deals

Growth financings for European companies amounted to over $16 billion during the period, with 34 investment rounds in excess of $100 million. While this was a reduction of 24% from the record levels of growth financing achieved in the comparable period of 2019, activity was still 4% greater than in 2018.

Arma Partners successfully advised on 17 transactions worth more than $19 billion in aggregate since January 2020, more than any other comparable period during Arma’s 17 year history. Arma’s transactions included:

Virtual meetings have become an accepted “new normal” and transactions have typically moved more swiftly and with fewer parties involved

C19 has resulted in new approaches to deal-making. Virtual meetings have become an accepted “new normal”, with negotiations and due diligence being effectively conducted online. Arma has observed greater emphasis from both acquirers and investors on committing aggressively to those opportunities that align with key priorities, represent a clear fit and a differentiated “right to play”. As a result, transactions have typically moved more swiftly and with fewer parties involved. Prior relationships, shared transaction history and familiarity have often been the difference between winners and cover bidders.

Arma actively supported Digital Economy deal activity in Europe and increased its share of transactions worth in excess of $1 billion to 33% by value and 20% by volume. In addition, during the course of the year, Arma raised over $300 million to support the growth of Digital Economy companies, increased the size of its team dedicated to the strategically important and highly resilient DACH region, continued to scale its Private Capital practice, and further developed its North American presence.

There are several factors that have contributed to sustained transaction and investment activity in Digital Economy companies, including:

  • Strong long-term fundamentals of the Digital Economy, including rapid organic growth coupled with significant operating leverage, seldom found in other sectors and therefore attracting increased public and private investment;
  • Fundamental shift by both the public and private sectors to automate workflow, deliver applications via the cloud and enable distributed and remote working with the adoption of Software-as-a-Service (“SaaS”) solutions;
  • Increased requirement for reliable and on-demand access to communications services, cloud computing and storage;
  • Systemic changes in patterns of consumer behaviour including media consumption, eCommerce, education and utilisation of financial and other online services; and
  • “Flight to quality” by equity investors and debt finance providers due to the reliable growth potential of Digital Economy companies compared with other sectors.

Prior relationships, shared transaction history and familiarity have often been the difference between winners and cover bidders

Global equity markets were valued at over $80 trillion by the end of 2019 and before the effects of the pandemic were felt. As 2020 began to unfold and C19 spread, the equity market shock of the pandemic was sharp and sizable, resulting in a contraction of the global equity markets in excess of $10 trillion. The central banks’ response was equally swift and decisive, learning from the experience of 2008/9, and a concerted programme of QE began with in excess of $6 trillion of liquidity flowing into the global economy; markets rebounded and, by June 2020, exceeded 2019 levels. The capital that flooded into global markets rapidly sought a home and investors prioritised the Digital Economy, which provides not only solutions to many of the challenges presented by C19, but also long-term resilience and significant growth potential.

In particular, investors sought out investment opportunities that would address the urgent needs presented by C19 to automate workflow, provide ubiquitous access to data and applications, as well as facilitate effective and efficient remote working. This focused considerable attention on the Software sector and, specifically, SaaS, with the workflow criticality and operational benefits of SaaS solutions providing strong momentum to the sector. In addition, a highly “sticky” revenue model based upon annual subscriptions with compelling forward earnings visibility enables investors to pursue opportunities with a high degree of confidence and conviction. Strong investor appetite saw valuations for publicly traded SaaS companies surge from approximately 10 times run-rate revenues in early 2020 to over 15 times by the second half of the year. In addition to Visma, IFS and Aareon – valued in aggregate at $17 billion – Arma also advised on multiple SaaS and software transactions including Corilus, Consignor, CoreHR and EcoOnline.

The push for automation, the growing need to manage securely large data sets and the underlying demand for high bandwidth connectivity to data and applications have been accelerated by C19 and caused a surge in the adoption of public cloud services. Sharply increased utilisation of cloud computing and storage has also been driven in part by cloud-based conferencing, telephony, messaging as well as greater intensity of consumption of streaming media services, social media and online commerce. Gartner predicts that public cloud services will grow 20% during 2020 to a total market value in excess of $330 billion. Arma successfully advised on several cloud services and communications transactions in 2020 including the sales of: M2M/IoT connectivity solutions provider CSL to ECI; public cloud transformation specialist NewSignature to Cognizant; and cloud-based telematics service provider Mobiliz to GPS Bulgaria.

The effects of C19 have also had far-reaching consequences for the consumer economy. Valuation increases of Internet companies such as Alphabet, Amazon, Facebook and Netflix have been underpinned by a significant uptick in both consumers’ propensity to consume content through on-demand services, including critically education and e-learning, and to undertake more eCommerce. This was highlighted by Tencent’s investment in French hyper-casual games business Voodoo in August 2020, which valued the company at $1.4 billion. Other beneficiaries of C19-induced lockdowns have included online media and food delivery companies, as a broader array of eCommerce vendors have seen swathes of new customers migrating online. Several large transactions were announced during 2020, including KKR’s $10 billion acquisition of Axel Springer and Adevinta’s $9 billion acquisition of Ebay’s European online classifieds operations, which accounted for a large portion of $26 billion media and Internet deal value during the period, which was down 30% versus the comparable period in 2019. Arma has successfully advised on growth financing transactions for Nordic food delivery champion Wolt, amounting to $240 million, as well as leading re-commerce platform Swappie, illustrating strong continuing investor appetite for the sector.

Finally, the rapid transformation of financial markets, financial services and payments via the adoption of technology has continued throughout the pandemic. The volume of sizable deal activity in fintech increased during the pandemic, while aggregate deal value remained largely stable. C19 has had a positive impact on several parts of the fintech ecosystem, notably accelerating the shift to automation and digital transformation by financial institutions, hastening the shift from cash to card based payments and the need for a seamless, omni-channel buying experience. This trend was evidenced by Arma’s role advising Lydia, a leading European mobile financial services platform, on its growth investment by Tencent, one of Asia’s pre-eminent technology and Internet groups. Meanwhile, financial sponsor interest in the sector has remained robust, underpinning Arma’s highly successful sale of leading fintech company smartTrade.

The pace of growth investment is likely to accelerate further given the significant investment firepower of private equity, growth equity and venture capital funds. Arma anticipates increased investor risk appetite for cutting-edge markets including “deep” technologies such as quantum computing, food technology and eco-friendly mobility, as the disruption to traditional industries resulting from technology adoption continues, to deepen.

When we emerge from the crisis and settle into the new world order, we will all be looking to the Digital Economy more than ever to power us forward

Prospects for the Digital Economy continue to be bright. Far from altering this picture, the pandemic has only served to reinforce the strategic relevance of, and investor appetite for, leading technology-enabled companies across a broad range of sectors. When we emerge from this crisis and settle into the new world order, we will all be looking to the Digital Economy more than ever to power us forward. At Arma Partners, we feel privileged to be able to play an active role in this digital revolution, humbled by the trust leading strategic and financial players put in us during this period of great uncertainty, and grateful that many of them have allowed us to achieve unprecedented levels of activity and deliver record results despite the pandemic. We look forward to continuing to help shape the world of tomorrow by providing to our clients insightful, value-added advice steeped in deep sector expertise and, together, emerge from this crisis stronger and more confident in our increasingly digital future.