This panel at the FT’s Global Dealmaking Summit posed the question ‘How frothy are current valuations?’ in technology M&A, moderated by the FT’s institutional and private capital correspondent, Antoine Gara.
The discussion opened with a ‘framer’ interview with Datasite’s chief marketing officer and head of corporate strategy, Doug Cullen, who remains bullish on growth outlook for M&A markets globally. There are few signs of slowing activity and growth. The accelerated digital transformation in the COVID era is providing new use cases for technology to facilitate dealmaking, be they in the expansion of investor and acquirer bases, or greater efficiency in human capital.
Marty Chavez, vice chairman of Sixth Street, joined the discussion by outlining the themes on which his firm focuses: the convergence of software and payments, and that of software and life sciences. David Toms is head of research at Hg, Europe’s largest software and services private investor. The movement of software to the SaaS model and the movement to the cloud is the hook around which most of his points focus.
The panel’s first question focused on valuations. Are we in the ‘dotcom era 2.0’? No, we aren’t, agrees the panel. The key differentiator is the nature of software sales. Twenty years ago, companies extracted as much value from customers early on as they could. This business model was unsustainable and led to constrained growth. With the model shifting towards more stable subscription models, valuations are in turn much more stable. The minimized decline of software markets during the COVID-driven market crash in 2020 is also evidence of technology's resilience to wider market corrections.
Investing in this space is not about timing; but rather balancing risk and reward, says Chavez. It’s about identifying risk-adjusted opportunities with the right structure in the right company.
Doug Cullen added that the seemingly unlimited access to capital is equally a differentiator to the dot-com bubble of the early 2000s. Although valuations can be prohibitively high for firms like Datasite, says Cullen, “There's no need to be bearish - there are plenty of deals out there and they are becoming more efficient.”
The advancement of artificial intelligence is adding value too. Moore's law has advanced the AI debate inexorably in the past few decades, leading to an explosion of opportunities. Chavez cited an example, Recursion Pharmaceuticals. After growing cells in human culture, they use AI technology to digitize pathology specimens. The software is so powerful that you can create a digital twin of a cell, a tissue, an organ, or even a human.
Toms points out that you have to work out what humans can do better versus what computers can do better. Hg is big in the tax and accountancy software space. Over the past few decades, accounting clerks have reduced in number, but client-facing accountants have increased. Computers are helping to redirect humans to new tasks that have more complex value adds. To summarize in Chavez’s words 'Artificial intelligence is a force multiplier.’
The panel commented on the perceived lack of innovation from large companies, particularly banks. Chavez spent many years at Goldman Sachs and helped build a consumer lending business - effectively a start-up within a 160-year-old business. David Toms points out that Goldman’s rival J.P. Morgan now spends around 16 percent of operational expenditure on technology, up from 8 percent ten years ago.
The panel concluded by talking about antitrust issues. The speakers agreed that there is more regulatory oversight and more information sharing in the M&A space than there used to be. The increased optionality brought about by new APIs leaves less need for acquisitions when not necessary.
But does this signal a bearish outlook for M&A, if acquisitions are less necessary as a result of APIs that plug companies into one another? The answer is that regardless of the benefits of these API-driven partnerships, in the longer term it will remain more economical to merge/acquire, thereby bringing everything in-house.
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