Competition and cooperation between buyers, target companies and vendors have always been two key dynamics in M&A processes. But a new and unique dynamic of ‘co-opetition’ is increasingly driving M&A in the communications, media and technology sector.
It’s a result of the profile of investors in technology having diversified significantly in recent years, transforming established relationships between participants in the M&A process and presenting a raft of new opportunities and challenges for both new entrants and incumbents.
I’ve previously discussed how, as technology becomes increasingly central to the core offering of leading companies across all sectors, these multinationals are obtaining the technical expertise they need through acquisition and thereby broadening the pool of potential strategic buyers for tech assets. A comparable development is taking place among financial sponsors, through the proliferation of non-traditional financial investors from Asia and the Middle East, as well as North America and Europe, interested in buying tech companies.
Sovereign wealth funds, for example, would previously have had to invest in venture capital and private equity funds to gain indirect exposure to private, pre-IPO tech businesses. Now they are leading the charge in establishing specialist in-house teams to make direct investments in tech companies. A study published last year by Boston Consulting Group recorded a 38% increase in the volume of sovereign-wealth-fund-backed technology deals since 2012, to account for an estimated 27% of total tech transactions in 2017.
This recent increase has been driven largely by Middle Eastern and Asian sovereign wealth funds targeting European and North American companies. GIC, the Singaporean sovereign wealth fund, was a participant in last year’s $5.3bn leveraged buyout of the Norwegian cloud software business Visma. Temasek, another state-backed Singaporean fund, made a strategic minority investment in the UK-based supply chain software provider BluJay Solutions that valued the company at $700m last September. And China Investment Corporation too reiterated its commitment to making more direct investments into US technology companies.
Nor are sovereign wealth funds the only game in town. Other non-traditional financial investors developing their direct investment capabilities with a focus on the high-growth technology sector include family offices and pension funds. Canada's Ontario Municipal Employees Retirement System, one of the first movers among pension funds in bringing its private equity investments in house, underscored the attraction of doing so with the €1.2bn exit of its investment in the UK IT services company Civica last year.
This growth in competition for a finite, albeit rapidly evolving, pool of assets might be expected to have deterred, or at least aggrieved, more established investors - particularly with the number of private equity firms chasing assets having already increased significantly in the past decade, as technology evolved from a niche sector serviced by a handful of specialist funds into one that’s core to many firms’ strategies.
However, that would be to underestimate the complexity of the new, co-opetition-led M&A environment in the tech sector.
Certainly to traditional private equity investors these alternative capital providers are competitors for assets they covet. But they also remain investors, or Limited Partners (LPs), in the funds that these private equity firms manage and invest. Tellingly, SoftBank’s Vision Fund, the $100bn superpower among tech-focused private equity funds, has Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Company as two of its largest investors.
Moreover, these alternative pools of capital provide buyout firms with new exit routes and enable greater flexibility in their strategies. Temasek acquired its minority stake in BluJay Solutions from the company’s tech-focused private equity backer Francisco Partners, allowing the firm to realise value from its investment whilst prolonging its exposure to the growth potential of a leading software business.
And for those largest transactions that require syndication, traditional and non-traditional financial investors can collaborate as co-investors. The leveraged buyout of Visma – the largest Europe has ever seen in the software space – was led by the UK private equity firm Hg, in partnership with GIC and other private equity buyers. Similarly, this month, the Canada Pension Plan Investment Board and Silicon Valley-based growth equity firm TCV announced the joint acquisition of a minority stake in Swiss sports data provider Sportradar from private equity firm EQT Partners, in a deal valuing the company at $2.4bn.
To this complex network of cooperative and competitive relationships between the different private capital providers we must also add the thriving ecosystem of major corporates who dominate large-cap M&A activity. Still driven by buoyant stock markets, readily available equity and debt financing and pressure from activist investors to strategically deploy cash reserves, the broad range of corporate acquirers continues to provide a multitude of exit routes, as well as supplying acquisition opportunities through spin-offs, divestments and take-privates.
This enhanced spirit of ‘co-opetition’ therefore looks set to persist, promising an M&A environment that is both unrelentingly active and increasingly complex.
