While the market presents an opportune time for M&A transactions and growth equity deals, companies will need to consider whether their financials are in a good position to make the most of the opportunity. Companies with strong or stable revenues are in a favorable position to execute a deal, especially if annual revenue is up from 2019. However, companies will also need to consider several factors, especially potential industry-specific headwinds in the coming year. In this research note, we suggest perspectives for companies to think about when considering deals.
As we close out 2020, it became apparent that companies expanding remote-work arrangements performed strongly in the stock markets, such as communication platforms Zoom and Twilio. These cloud-based SaaS platforms generate recurring revenue, which adds business resiliency amid the global pandemic. SaaS solutions can also be offered as part of a cloud ecosystem, making it more efficient for companies to manage data, perform analytics, and drive automation for business processes.
As companies enter the growth stage of the startup cycle, founders must start to consider a new aspect of business: M&A deals. These deals could take the form of a strategic company acquisition to expand product offerings or gain market share (buy-side), or getting acquired by a larger company (sell-side). Although there are differences between financing and M&A processes, founders may want to consider building up fundraising experiences to better prepare for future acquisitions, be it from a VC or PE fund. This will help founders understand how to engage and negotiate with buyers to generate long-term benefits for the company, while tapping into the expertise, networks, and capital of existing financial backers to maximize deal outcome.
With over $50 billion raised by SPACs so far this year, companies that plan to go public have a new option they can take. A significant share of the proceeds will likely go towards tech/FinTech companies. Despite growing concerns that SPACs may be a fad, this phenomenon can be favorable to all the relevant stakeholders including SPAC founders, target company and retail investors. In the short-term, more SPACs will emerge to take advantage of the trend, with some turning out to be bad apples. However, over the long-term we can expect SPACs to undergo natural selection, as visionary SPAC founders with less egregious allocations are preferred and thus can raise larger SPAC deals eventually.
As tech stocks continue to outperform and maintain high P/E ratios, there has been growing concerns about whether this is sustainable. With the upcoming election, the markets may become more volatile leading up to the event. We should also note that there are several supporting mechanisms that will likely prove favorable for the markets, such as record levels of private equity dry powder that may bid up the valuations of fundamentally strong companies. While the tech market shows positive signs of holding up, tech-enabled consumer-facing businesses may not benefit as much as mission-critical enterprise SaaS firms. The former tends to have heavy operational and marketing costs, while the latter is able to generate higher, recurring revenues, leading to a bifurcation in the tech markets.
As the economy struggles to recover, a number of tech startups have found themselves in potentially a challenging situation. Founders who are trying to exit and cash out may want to consider selling their company to private equity firms. With a lot of uninvested capital at their fingertips, PE firms have been hunting for ideal companies that fit into a ‘buy-and-build’ strategy. Should a tech startup have solutions that complement well with a PE firm’s existing portfolio company, it could be acquired as part of a larger entity to generate greater value. In this article, we explain more about the strategy and how startup founders can potentially end up with a substantial payout by considering this approach.
This type of growth strategy in private equity land has been gaining acceptance and steam over the last decade. The platforms backed by the private equity funds often pay a “strategic” value, while moving at the speed of private equity. This is extremely attractive to sellers seeking a fair valuation in a reasonable timeframe. Based on our real-time transaction experience, private equity funds are even more hungry for add-ons, even in today’s pandemic environment. Entrepreneurs and executives who are considering a sale transaction, should strongly consider the advantages of selling to a private equity backed platform.
Over the past decade, companies like Apple and Microsoft have consistently been amongst the most valuable companies globally. The ascendance of these Big Tech companies has sparked concerns of whether some have become “too big to fail,” as were Wall Street banks during the 2008 Financial Crisis. Meanwhile, the SaaS revolution brought software onto the cloud, powered mainly by Big Tech. In particular, Amazon’s AWS has a commanding lead as a cloud service provider. We explore the cloud economy’s growing dependency on AWS, while at the company level, the use of AWS is often used as part of a multicloud strategy. However, this strategy does not necessarily lead to enhanced cloud resiliency. Outages will continue to result in steep financial losses unless there is a stronger focus on storing the same data across multiple servers ie. cloud redundancy.
With mounting concerns of a Covid-19 “second wave,” SaaS companies like SalesForce, Shopify and Workday are poised to benefit as companies extend their work-from-home policies. These SaaS / mission-critical software service firms provide cloud-based solutions for employees to operate efficiently in the safety of their homes. Google has already allowed most employees to work remotely through the rest of the year, with Twitter and Facebook choosing to do so permanently. As the rest of the economy transitions to digital workplaces, business processes will be adapted to SaaS platforms and will be increasingly integrated, streamlined and automated. The long-term subscription revenue of these SaaS companies is expected to keep pushing up their valuations this year.
In March, the Paycheck Protection Program (PPP) was initiated to provide loans to small businesses, as part of the comprehensive coronavirus stimulus bill (CARES Act). Through this program, $660 billion was authorized to support business owners keep up their payroll and other operating expenses. However, the scale of the program and lack of borrower scrutiny has attracted numerous fraudsters, including a NYC resident who was charged with a $20 million PPP and SBA loan fraud. In this report, we highlight fraud strategies such as “loan stacking” and the use of FinTech to address these problems.