Pricing pressure

by Brenon Daly

No matter where shoppers looked last year, the tech M&A market was a pricey place to be. Unprecedented valuations are one of the main reasons why overall acquisition spending basically matched the highest level since the dot-com collapse. 451 Research’s M&A KnowledgeBase recorded $573bn worth of deals in 2018, nearly equaling 2015’s record but on 20% fewer transactions.

Drawing on the M&A KnowledgeBase, we see that ‘valuation inflation’ played out in deals across the entire tech landscape:

At the top end of the market, both corporate and financial acquirers in 2018 paid multiples that were a full turn higher than either group has paid for their big prints since the recession. Our data shows that in the 50 largest transactions done by each of the buying groups, private equity shops paid 5x trailing sales while strategic acquirers paid 6.3x trailing sales.

Turning to the VC market, startups that exited last year did so at relatively rich prices. On a median basis, startups sold for 5.8x trailing sales in 2018, almost one-third richer than the 4.5x multiple recorded in the M&A KnowledgeBase since the start of the decade.

As my colleague Scott Denne recently noted, software buyers paid a median 7.6x trailing sales in the record number of $1bn-plus deals they inked last year. They had never paid more than 5x sales in any year since the recession, our data shows.

However, the astonishingly rich multiples paid in last year’s deal flow may well stand as the high-water mark. At least that’s the prevailing view of senior investment bankers we surveyed. In a December survey, a record number of respondents to the 451 Research Tech Banking Outlook Survey predicted tech transactions going off at lower M&A multiples in 2019. (See our full report on the survey.)

Fully two-thirds of senior bankers (68%) forecast discounting in deals in the coming year, more than twice the number of bears in the two previous years of surveys. Just 4% anticipate M&A pricing ticking higher in 2019.

Posted in M&A