Nowadays it is very common to see the “billions” price tag in technology companies acquisitions, of which sometimes the target is barely profitable or has proven business model. Is the customer base or technology really worth that much in all of these acquisitions? What’s your view?
Tech companies can have high multiples at 15X or more.
Cybersecurity or A.I up to 40X.
Our acquisition board’s view is that “hot” industries or sectors cannot be purchased due to its high multiples and subsequently, poor DSCR (for us) as cash flow will not cover debt service via LBO.
It’s a bull market and premiums are plenty. When valuations correct in equities, many acquirors will have overpaid so they need to be cautious of the macro conditions. However, this technology boom is long-term and if you are bullish long-term on technology, you’ll likely take the risk to purchase the premium to focus on io and ip lead extension
I believe there are macro and micro condition that influence a particular valuation. On the macro side, valuation of a company nowadays given the very low interest will definitely command a hefty price tag. QE and Gov policies geared to stimulate the economy will support such valuations. On the micro side, there are many growth and market size assumptions that are often made in the technology sector that tends to inflate future income statements.
Perhaps the overvaluation of target tech companies (i.e acquirer’s optimism) is linked/fuelled by soaring share price and valuations in the tech sector in general – which may explain why a good number of acquisitions are using stock as a currency for acquisitions deals?