HR Tech M&A Deal Trends

We saw a big jump in the number of HR Tech transactions in 2018 and there have already been 30 transactions announced in Q1 2019.

Since 2015, annual transaction volumes for HR Software companies has been fairly consistent. This changed dramatically last year when the total number of companies acquired in this market increased 55%.

We are also seeing bigger transactions with each year. Historically, very large transactions tend to spawn more activity in the mid-market as companies work to remain competitive and often pursue an acquisition strategy to supplement organic growth. We see an increase in consolidation as companies look to increase mass, customer base, and geographical markets, and add complementary products to cross-sell to their customers.

YEAR TOTAL DEALS TOTAL VALUE
2019 30 $ 12.2B
2018 104 $ 4.8B
2017 67 $ 3B
2016 62 $ 141M
2015 60 $ 1.3B

If 2019 continues at the same pace we have seen in Q1, it will be an even bigger year for transactions than last year.

What Does This Mean for Shareholders?

A competitive M&A market means stronger valuations, a greater number of potential, and better quality buyers and an opportunity to explore a transaction at peak market conditions.

Everyone we talk to is getting approached weekly by both PE firms and corporates. Many end up going down the rabbit hole with just one buyer.  This is a mistake, especially in such a competitive market. How will you know if the offer you receive is the best offer you could get? Or even if this is the best buyer?  Even when a company is approached, the length of time and effort it takes to gather and prepare all the necessary information is a huge drain on the shareholders.  It is very difficult to grow your company while you are trying to sell your company.  Founders who engage with an experienced advisory firm to run a well-planned market search can safely say they did their due diligence, received multiple offers, and achieved the best possible outcome based on their objectives.

It’s easy to see by looking below at the announced deals with published values to-date in 2019 that “multiples” are all over the place (everything from .4x to 14x revenue). In reality, multiples are just a simple expression of the value a company received. Buyers don’t ever approach a potential acquisition saying they are going to pay X times revenue or X times ebitda. Valuing a software or IT company is far more complicated. Each facet of the company is examined in great detail before the buyer can provide a valuation they are willing to pay in order to acquire your company.  Valuations take into account both the present and historical company performance as well as the post-transaction synergies the buyers can expect to gain when combined with their own resources. It makes sense then that different buyers will see different benefits to your opportunity and will approach valuation in large part by how critical you are to their strategy.  This is yet another reason to work with an advisory firm that is skilled at bringing multiple qualified buyers to your process.

What Attributes Contribute to a Premium Valuation?

  • For tech companies in particular, top-line growth is often the biggest determinant of value. Companies growing well above others in their market are stealing someone else’s lunch and buyers will pay a premium for this.
  • SaaS offerings. Today, most buyers expect companies to have a SaaS offering. Those with legacy solutions can expect to receive a lower valuation than their SaaS counterparts.
  • Size of the company. Bigger companies get a lift in valuation because they are simply more accretive.
  • No revenue concentration. If your top 5 customers represent more than 30% of overall revenue, the increased risk inherent for the buyer gets reflected in valuation.
  • Dominance in a vertical market.
  • Sticky, enterprise customers.
  • Strong management team
  • Ability to scale (company has implemented strong internal systems and documented procedures)
  • Clean financials that are GAAP compliant
  • Having multiple qualified, good-quality buyers submitting competing offers
  • and many more

Are You Evaluating Options?

If the shareholders or Board are evaluating options, we can provide guidance on positioning, timing, and valuation.  CLICK HERE if you would like to schedule a call.

Deals with Announced Values 2019 YTD

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