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Covid-19 Accelerates Growth Within the Technology Sector

Covid-19 Accelerates Growth Within the Technology Sector - ITZOO

As COVID-19 continues to impact the global economy, investors appear to view many industry sectors within Technology, Media & Telecommunications (TMT) as highly attractive, with the Nasdaq Composite recently hitting all-time highs, supported by companies either shielded from, or directly benefitting from, the ongoing crisis. One of the few sectors to have emerged in a stronger position as a result of the pandemic has been the Technology sector. Around the world, tech focused indices and equities have significantly outperformed the broader markets. Whilst revenues and sales have plummeted across most sectors and industry groups, Software & Computer Services and Hardware & Equipment providers have benefitted from increased uptake from individuals and businesses alike.

Pre-existing trends driving Mergers and Acquisitions

 

Businesses that were performing well prior to COVID-19, such as cloud, SaaS and security companies, have felt additional benefits from social distancing and remote working. The BVP Nasdaq Emerging Cloud Index is 30% above its previous record high, illustrating the outperformance of cloud and SaaS companies. While these valuations are expected to fuel more IPO activity, the increasing premium of cloud companies over non-cloud hardware and software companies may significantly reduce M&A as a vehicle to accelerate the movement to cloud.   

Large tech companies also continue to broaden their footprint, supported by continued Mergers and Acquisitions (M&A) and benefitting from their diverse operations, extensive geographic reach and significant resources. Although global advertising revenues have suffered, big players dominating the space are protected by their strong cash balances. Small competitors will emerge in a much weaker financial position and may become consolidation targets.

E-commerce is taking precedence over physical retail as consumers avoid public spaces. Companies such as Amazon have become staples for many consumers, while upstarts such as Wayfair and Shopify take market share from their physical retail counterparts. Brick-and-mortar retailers, many of whom were struggling to address e-commerce trends before the pandemic, may look to rapidly acquire online capability to survive.

Consumers have moved to streaming options and accelerated their “cord-cutting” over the past few months as COVID-19 impacts household incomes and consumers curtail their subscriptions in the absence of traditional sports broadcasting. E-sports has taken advantage of this vacuum to increase presence and audience.

Finally, telehealth has seen a major surge as many healthcare providers and patients looked to avoid in-person visits. We expect this change in consumer behaviour to persist and for providers to consider acquiring capabilities relating to virtual consultations.

New trends emerging

The pandemic seems to have accelerated the secular growth trends in the Technology sector. Boosted by work from home, technological adoption has reached new heights in recent months and this trend looks set to continue for the foreseeable future.

COVID-19 accelerated existing trends as businesses continue shifting to all things digital, e-commerce displaces traditional stores, mobile app-based food-delivery providers capitalise on social-distancing restrictions, consumers hasten their switch to streaming over traditional media and remote working increases. The movement towards digitalisation will spur companies to use M&A to improve their capabilities in this space. TMT companies that adapt their strategy and deliver value in the current environment will be strongly positioned when the economy recovers. The large technology companies will continue to do well, although they will need to deal with increasing regulatory scrutiny globally.

TMT M&A activity is expected to pick up in the second half of 2020, although global trade frictions will remain a headwind throughout the year. M&A activity is expected to return as companies focus less on capital preservation and start seeking new opportunities. Those companies affected by COVID-19 will take a closer look at their existing businesses to evaluate which areas are core and which to divest.

PwC reports that we will begin to see the following trends as drivers of Mergers and Acquisitions (M&A) hotspots across technology, media and telecommunications:

  • M&A activity driven by technology is likely to become more common as companies look to shore up vulnerabilities and capitalise on sector shifts emerging from COVID-19. 
  • Video games has been a hot sub-sector as the quarantined populace sought alternative entertainment. Several acquisitions have already occurred and increased M&A activity is likely going forward. Similarly, there have been several recent transactions among mobile app-based food-delivery providers. 
  • Telecommunications companies globally have seen a significant increase in demand for their services, which has highlighted the need for infrastructure upgrades. For companies with the financial resources, we expect increased investment in wireless, wireline, fibre, 5G and telecommunications equipment.
  • Cloud, SaaS and security companies have performed well, although high valuations may deter investors from pursuing significant M&A deal activity. However, with the rise in valuations and the recent opening of the IPO window for fast-growing tech companies, we expect more IPOs in this space. 

 

Source: Stockopedia

Source: PwC

 

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