The Australian technology sector is well positioned for a post-COVID recovery, which is likely to be accompanied by a wave of M&A activity, according to a new analysis of the sector from EY.
The outlook is especially optimistic for B2B technology companies that provide services to enable ongoing remote working or the explosion in the number of consumers using online channels during the coronavirus crisis.
“With technology further embedded in the daily routine of both enterprise and consumers, expect the sector to lead M&A activity and in turn drive investor returns,” writes Colin McNeil, EY partner for mergers & acquisitions.
That optimism is shared by investors.
In the early stages of the current crisis the ASX Technology Index fell by 41 per cent, shortly after it was launched, compared to the ASX200 which fell 35 per cent over the same period. However the recovery of tech stocks in Australia and the US has been markedly stronger.
“As of closing on the 22nd May 2020, the ASX All Technology Index has recovered significantly to sit at -4 per cent compared to -21 per cent for the ASX200. While there are varied underlying factors driving this recovery, from an investment perspective, the technology sector appears more resilient than others,” McNeil writes.
“While the impacts and uncertainty created by the COVID-19 crisis were felt early and intensely in the Australian tech sector, the recovery has also been notably swift.”
According to EY’s capital confidence barometer (CCB), technology executives are markedly more optimistic about the speed of recovery with 63 per cent expecting a V-shaped recovery compared with 38 per cent of non-technology respondents.
The data, based on a survey of 2,900 executives across 46 countries, also indicates that companies with deep pockets will likely turn to M&A to accelerate their recovery following the crisis.
According to the CCB, 72 per cent of global technology respondents are actively conducting more frequent strategic and portfolio reviews to define capital allocation decisions and drive accelerated recovery.
“There appears to be a consistent theme that well capitalised technology companies will seek to deploy capital through acquisitions to accelerate their recovery and position for growth as we enter into the new economy,” writes McNeil.
According to EY’s analysis of the Australian technology sector, there is enough cash in the system to fuel an M&A spree.
“Recent capital raisings of over $300 million in the sector, along with a significant amount of private equity dry powder (more than doubled since 2008 to sit at A$23 billion at June 2019) present a solid war chest for which to pursue and execute deals,” McNeil said.
EY’s analysis also noted an important distinction compared to the GFC. Whereas in 2008, the focus was on repayment of debt, in 2020 technology companies are pursuing an improved liquidity and working capital position.
“While this may be due to record low interest rates, it also underpins the general strength within the sector and that Australian technology companies are positioning for growth rather than survival.”
The research notes that business resilience will be a key factor in evaluating target companies.