2013 M&A Outlook for Lower Mid-Market & Small Software and Tech Companies

According to a number of industry indicators 2012 was a little slower for tech M&A transactions than anticipated, or 2011 results.  Reported private equity transactions were lower and virtual data room providers, industry publications and analysts report volume of transactions and value of total annual deals down by as much as 25%.

While that may be true for mid-market to large public deals, our observations are quite the contrary.  We focus on small – lower middle market, IT, software, services, communications, digital media and mobile app firms and it seemed that successful deals were very strong, as high as or higher than 2011.

The US market saw an accelerator to deal completions as small private companies tried to close transactions prior to any pending tax changes Washington was considering.  Despite this artificial stimulant disappearing, we believe the strong underlying conditions in the market will see us with another busy year.  These include:

  • The constant churn of evolving technologies and business models within most markets will continue to put emphasis on strategic partnerships or acquisitions.
  • We’re still in a slow economy and market share is easier to buy than to grow organically.  This is particularly true in markets where technologies are maturing and companies are selling replacement products over new market game-changing innovations.
  • Considerable cash is sitting on the balance sheets of profitable companies and they have limited alternatives to generate suitable returns other than to invest in acquisitions.
  • The circle of life is looming bright in the headlights for a large number of baby boomers in North America who are looking to reduce their risk, retire, or focus on goals other than their current business.  These people are going to sell.  Few small firms will ever see an IPO and the tech industry has the absolute lowest rate of inter-generational business succession.
  • Globalization is moving down-market.  Small or regional competitors are disappearing as multiple influences break down the barriers of geography, time zones, language, currency and support.  Selling to a strategic buyer that has this mastered is the dream of the majority of tech company owners and we believe that 2013 will see an increase in cross-border M&A transactions of smaller companies.
  • Entrepreneurs are still falling into the trap that the best product doesn’t win market share.  Most markets are dominated by several large firms and a close examination shows that they rarely if ever held the position of having the best product.  There will continue to be large waves of tech entrepreneurs who build great products first, then realize they don’t know how to market.  These make for easy “buy vs. build” decisions by market leaders.
  • The market will continue to be fairly balanced, not particularly favouring buyers or sellers.  We’ll see great high-growth companies getting premium deals, average companies having average outcomes, and poorly performing companies will receive distressed valuations.  Of course there will be outliers where companies get outrageous valuations and those are the interesting ones we’ll all read about.

Check back mid-year and we’ll have an update for you on how the year is shaping up and the outlook for Q3 and Q4.  In the meanwhile if you would like to have a confidential conversation about your strategy, or know of others that might consider our services we’d welcome the introduction.


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