2020 Outlook: Four Trends to Watch in the Tech Sector

Feb 2020

2019 was a year of robust activity in the tech sector, and another record year for Lincoln International’s TMT team. Several notable Lincoln deals include the acquisition of Livermore Software Technology Corporation and the cross-border sale of CoreMedia AG in Germany to OpenGate Capital in the U.S.

As we enter 2020, investors are curious as to where M&A activity will head in the first year of the new decade. Their curiosity is fueled by several factors including global political uncertainties, from Brexit to a U.S. presidential election, a potential economic slowdown and record levels of dry powder.

Technology was the most active sector in M&A in 2019, in both the number of deals and deal amount. Software deals drove most activity and will continue to do so in the new year. In fact, a recent Lincoln International survey of 160 private equity investors found that application software is one of the hottest subsectors in tech, along with data and analytics management and education technology.

At Lincoln International, we believe 2020 will continue to present tech investors with opportunities for success. Looking forward, four trends we expect to see in the new year include:

Increased activity in the first half of the year. Activity will continue through the first half of the year for two reasons. First, there is a current backlog of deals that need to be completed. Second, activity will increase in the first half of the year before slowing down ahead of the U.S. presidential election. Investors are avoiding that time of year because processes may take longer than expected and the uncertainty surrounding election results may generate volatility.
PE firms will focus on deploying capital. At the end of 2019, PE firms were sitting on record levels of dry powder. It comes as no surprise that their number one priority in 2020 is deploying capital. In fact, our survey found that 8 in 10 (79%) PE firms are prioritizing the deployment of capital in the new year. The large amount of capital chasing deals likely means that any downturn, should there be one, would likely be relatively short and shallow.
Investors seek data from last recession. Valuations have been high for tech companies over the past several years. High valuations cause investors to be more selective, and while good assets will do fine, marginal assets will be under more scrutiny. For those companies, investors are paying particular attention to how they performed during the last recession. Having data to justify how your company performed, and thus will perform in a potential downturn, will make a company more attractive to prospective buyers.
Need for diversification. If there is an economic downturn there is concern that tech companies will drag each other down. As such, many investors are looking for technology companies with a client base that is either highly diversified or not concentrated within the tech sector.

 

Stay tuned for more True Perspectives from Lincoln throughout 2020, including infographics exploring individual TMT opportunity areas throughout the year.

Summary

Meet Our Senior Team in Technology, Media & Telecom

Related Experience in Technology, Media & Telecom

Related Perspectives

Order Up: Dramatic Change in Consumer Behavior Drives Accelerating Need for Restaurant Technologies

Read More

Fleet, Field and Asset Management Software: Convergence Creates Investment Opportunities

Maintaining equipment, vehicles and other assets while also optimizing performance of employees and the work they do is a daunting task for any organization. To address this challenge, both large… Read More

Education Technology & Services Market Update: Q1 2021

As we expected early in the year, 2021 is shaping up to be a banner year for mergers and acquisitions (M&A) in the education market. Complementing all of the trends… Read More

Q&A with Lincoln TMT Managing Director Don More: Hacking Cybersecurity Investment

Lincoln International recently welcomed Don More as Managing Director focused on Cybersecurity on the Technology, Media & Telecom team. Don brings to Lincoln 20+ years of deal experience in cybersecurity,… Read More