Investors are coming after cloud solutions providers post-COVID

Investors are coming after cloud solutions providers post-COVID

Tech sector will lead M&A activity as economy begins to recover

Credit: Dreamstime

Business-to-business (B2B) technology companies reliably providing cloud solutions to enterprise and government clients are being viewed as the major ‘winners’ among investors as the economy shifts into gear following the impact of COVID-19.

This is according to the latest EY Global Capital Confidence Barometer (CCB), which takes a snapshot of the corporate confidence and economic outlook among executives within the technology sector, surveying 2,900 executives across 46 countries. 

In the Australian tech sector, EY partner for mergers and acquisitions Colin McNeil said that while the impacts and uncertainty created by the COVID-19 crisis were felt early and intensely, recovery has been swift. 

At the start of the COVID-19 crisis, the S&P/ASX All Technology Index fell 41 per cent, and as of closing on the 22 May, it recovered significantly to sit at -4 per cent. While there are varied underlying factors driving this recovery, McNeil said from an investment perspective, the technology sector appears more resilient than others.

“The technology sector has long been seen as both attractive and risky, with perceived lofty valuations and volatility sitting alongside rapid growth,” he said.

So far, capital raising has hit more than $300 million, along with a significant amount of Private Equity dry powder (committed but unallocated capital) — more than doubled since 2008 to sit at $23 billion as of June 2019. McNeil said this presented a solid war chest for which to pursue and execute merger and acquisition (M&A) deals, an area where the technology sector will take the lead.

Business resilience will be a key factor in evaluating M&A targets, McNeil said.

“The initial shock of the COVID-19 outbreak has paused and delayed many deals. 39 percent of technology executives flagged “business resilience of targets” as being the biggest factor in future M&A strategies. Going forward, it will be imperative to use appropriate rigor during due diligence,” McNeil said. 

“As investors look to ‘pick the winners’ it appears B2B technology companies that are reliably providing cloud solutions to enterprise and government clients will have cemented their position and have significant opportunities for growth ahead.

“With technology further embedded in the daily routine of both enterprise and consumers, we expect the sector to lead M&A activity and in turn drive investor returns,” McNeil added.

The CCB report highlights a further shift in executives’ mindset from crisis management to strategic execution, M&A will be a key lever that well-capitalised companies will use to accelerate recovery, along with divesting non-core assets to build reserves for these pursuits. 

“History suggests those companies that act decisively achieve greater returns than those that take the wait and see approach,” McNeil said. 

In recent weeks a few listed companies such as Dicker Data was seeking to raise $55 million to partially fund the under-construction warehouse, plus its partner financial services arm.

Its capital hunt follows a recent successful capital raise by rival distributor Rhipe, which struck almost $34 million in investor capital in order to pursue further acquisitions and growth plans for its cloud software subscription business.

NextDC is another example in launching an equity raising effort of around $672 million.

There will be $350 million allocated towards the S3 centre; $307 million will be put towards growth driven initiatives including capacity requirements and development opportunities and $15 million towards transaction costs.

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