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Strategic positioning essential for pre-scaled tech companies seeking premium M&A valuations
Wed, 11th Oct 2023

Positioning customers as acquirers, showcasing sales momentum and protecting hard-to-replicate technology will lead to high multiples for pre-scaled tech companies, according to DAI Magister.

Lee Chin Jian, Vice President at DAI Magister, says the tech M&A landscape has been shifting to a buyer’s market in 2023. 

"With lower valuations, reduced competition for deals, and an abundance of attractive growth assets available, cash-rich corporations are well-positioned to capitalise on these opportunities through strategic acquisitions."

Despite the increasingly favourable conditions for buyers, prospective acquisition targets should be encouraged by the rebound of multiples from the recessionary lows of 2022. Earlier this year, Edenred acquired Reward Gateway for $1.15bn at a 20x EBITDA multiple, while NASDAQ’s acquisition of Adenza for $10.5bn came at an 18x EBITDA multiple.

According to Jian, pre-scaled or minimal revenue-generating pure-tech companies must brace themselves for heightened scrutiny from potential buyers and work to strategically position their company, attract the right buyers, and maximise their unique strengths to secure premium valuations.

“Today’s sellers must navigate a more challenging M&A environment that requires diligent planning and implementation of the right strategies to achieve high multiples," says Jian. 

"However, strategies for attaining high transaction multiples vary significantly between pre-scaled pure-tech firms and revenue-stable companies operating in broader tech sectors.

“Customers who rely on a target company’s technology are more likely to make significant investments in that company. Target companies can capitalise on this dynamic by expanding into sectors where potential acquirers are active and proactively aligning their direction with the acquirer’s vision," Jian says.

“Customers turned acquirers are more likely to pay top dollar if they can rapidly access the desired technology by acquiring the target company, as this circumvents the challenges of assembling an expert tech team and in-house development. Customers as acquirers are also motivated by the desire to avoid ongoing royalty payments and safeguarding exclusive access to a technology to prevent rival companies from obtaining it."

Jian says another effective way pre-scaled tech companies can boost valuations is by protecting their technology with patents. 

"Patents are invaluable assets that establish a legal monopoly around a company’s technology, signalling to investors and potential acquirers that it is exclusive and defensible," Jian says.

“Tech companies that demonstrate substantiated sales and revenue growth projections based on meaningful conversations and commitments with customers can also significantly enhance their valuations."

Jian says investors are far more likely to be interested in a company with a clear path for generating future revenue, even if it has yet to materialise. 

"Providing a clear and transparent overview of the sales pipeline, showcasing prospective deals and partnerships in progress, demonstrates growth potential and market traction, which are highly attractive to investors.

“Success in the tech M&A world comes to those who understand that the best way to sell is not to sell at all. It’s about being so appealing, strategically aligned, and valuable that potential acquirers can’t resist making an offer.”