Tech megadeal market thrives despite unparalleled upheaval

Despite continuing uncertainty amid the COVID-19 pandemic, the technology sector saw transformative deal activity soar over the past year, with mergers and acquisitions (M&A) increasingly becoming a key lever for growth as businesses look to recovery. This is according to the 23^rd edition of the EY Technology Global Capital Confidence Barometer (CCB), which gauges corporate confidence in the economic outlook among technology executives.

Megadeals that were US$5b and above represented 59% of all global technology sector deal value in 2020, up from 47% in 2019. This is consistent with the CCB findings, with 16% of sector respondents planning to pursue transformative deals valued at US$5b or more in the near-term. Technology companies further outpaced the market in relation to total shareholder returns according to the report, enabling many businesses to generate substantial returns despite only modest growth in revenue and profitability.

Overall, technology executive respondents are optimistic about the future, with nearly half (47%) expecting profitability to fully rebound this year (vs. 23% across all CCB respondents). And while technology respondents acknowledge that the outlook for short-term organic growth is challenging, 51% plan to pursue M&A in the next year to sustain growth.

However, optimism is tempered by an increasingly competitive deal market and the ongoing impact of geopolitical tensions. Seventy-eight percent of technology executive respondents expect to see more competition in the bidding process for assets in the next 12 months, primarily from private capital, while 81% believe geopolitical challenges have forced a change in their strategic investments.

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“The lessons learned from this global crisis encourage executives to make profound and far-reaching changes about the fundamental aspects of their business. The COVID-19 pandemic has led to an even greater acceleration of transformation, with companies now seeking not only to restore pre-crisis performance, but also to reform their future for a post-pandemic world. Trading activity in the local technology sector has increased over the past 12 months, amid greater external demands for outsourcing companies – acquisition of talent, solutions and e-commerce, as well as solutions that enable the expansion of services on digital channels. Another major factor, which has influenced the increase in trading activity, is the fact that most companies have been forced, under the impact of the pandemic, to expand their traditional services on digital channels, vital during the recession”, said Marius Nicolae, Head of Technology, Strategy and Transactions, EY Romania.

Tech talent and long-term value initiatives are top of mind

The pandemic has created a shift in how technology companies think about securing the best talent, according to the CCB. With remote collaboration now giving businesses a wealth of opportunity to source talent, 82% of technology CEO respondents specifically say it has changed how they view their future state operating model. Meanwhile, 91% of tech CEO respondents indicate that employees have influence over their strategy reviews.

Beyond the talent agenda, executives are turning their attention more broadly to how they can future-proof their business in the current landscape. Seventy-seven percent of all tech respondents believe it is important for companies to articulate a broader narrative around long-term value creation to all stakeholders. Similarly, most tech executives believe there is greater awareness among stakeholders around the environmental and social impacts of business (79%), and that focusing purely on profit optimization is not sustainable (86%).

With the tech sector coming under increasing scrutiny because of factors including social trust, privacy, data use and regulatory compliance, customers and employees are now looking to technology companies to take the lead on environmental and social change. By readily disclosing performance measures and being transparent about issues such as sustainable operations, energy management and product consumption, companies can build trust and credibility within and outside their organization.

For more information on the EY Global Capital Confidence Barometer, visit ey.com/ccb.