Tech M&A Update – post-Covid situation dwarfs pre-Covid

The Tech M&A market has been extremely vibrant over the last 6 – 9 months, driven by investment capital pouring into the Tech market, and an increasing customer demand for Tech solutions. The juxtaposition of pre-Covid versus post-Covid times shows the exceptionally strong performance of the Tech M&A market.

The number of M&A transactions has climbed by 20% quarterly in contrast to pre-Covid with an accompanied 100% rise in average deal value. This confirms that due to Covid an ever-increasing amount of investment capital is chasing Tech investment opportunities.

Sales Multiples (Enterprise Value divided by Recurring Sales) for Tech companies have soared with the US leading the path. Sales Multiples are up by 23% globally compared with pre-Covid multiples, with sales multiples of European companies growing by 15%. Consequently, Covid drove an even bigger wedge into the already existing valuation gap between Europe and the US. The spread now stands at almost 50%.

From a global perspective, fundamental financial drivers such as sales growth and profitability (EBITDA) have remained relatively stable pre- vs- post-Covid despite the growing Sales Multiples. This indicates a window of opportunity of 12 – 24 months, which might disappear if financial performance does not catch up with the hike in Sales Multiples.

The already established relationship that profitability does not really drive valuations in the Tech space, but growth does, remains intact. Moreover, the famous Rule of 40 is reflected by the Upper 50% of Tech companies fetching far higher valuations.

Tech companies surpassing the Rule of 40 attract a valuation premium of almost 200% in contrast to Tech companies in the Lower 50%. Consequently, companies ought to focus on growth rather than profitability when ramping up towards a strategic exit.

Finally, we see an IPO market frenzy with soaring Sales Multiples. Sales Multiples in recent IPOs have gone up by 65% in contrast to pre-Covid times.

IPOs as an Exit route also drive up valuations in trade sales. Let alone SPACs as the new kid on the block adding an additional exit option. Thus, we anticipate further increases in Sales Multiples in the Tech M&A market.

Now is a very attractive time to sell equity in a Tech company especially leveraging on the valuation arbitrage out of Europe vis-a-vis the US. We see a lot of interest from international buyers paying extraordinary valuations.