Mid-year Review in TMT: Navigating the COVID-19 World

More than a decade has passed since a crisis has so drastically affected companies’ market options.

While the Great Recession was one of a financial making, the COVID-19 pandemic is a public health emergency that has changed the way companies look at different markets and what strategic options may be available to them.

To help subscribers navigate our new normal, Mergermarket’s TMT reporters talked to executives, sector advisors and industry experts to analyze what is going on in the M&A, IPO, venture capital and debt markets.


M&A Outlook: cautious optimism for 2H20

Mergers and acquisitions in the US’s technology media and telecom space started strongly in 2020 — then the COVID-19 pandemic dealt it a severe blow.

Dealmaking halved to USD 80.5bn in 1H20, down from USD 170.3bn in 1H19 and USD 152.7bn in 1H18.

April was the cruelest month, as buyers hit the pause button before a resurgence in June as nationwide lockdowns eased.

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Dealmakers now are cautiously optimistic for 2H20.

“Most of my clients are going out looking for deals again,” said Derek Liu, a partner at Baker McKenzie.

Armageddon was averted thanks to a combination of government stimulus money and venture investors writing checks to keep their portfolio companies solvent, Liu added.

Reasonably healthy levels of M&A are expected for 2H20, provided there is no second wave and no more shutdowns, said Liu.

Cloud computing, business software, ecommerce platforms and IT security – all areas in high demand during the pandemic – will see dealmaking, said one sector advisor.

The trend towards remote work, digital events and virtual healthcare also will lead to private equity firms looking at investments in communication infrastructure technology, added a second sector advisor.

Earnouts will play a larger role in valuing deals to compensate for a wide spread between buyer and seller valuation expectations, added the second advisor.

Companies, made cash conscious by the pandemic, are likely to turn to joint ventures and partnerships as an alternative to a more expensive formal merger, said a third advisor.

“People are adjusting to the new normal,” said Liu.

— Mark Andress and Thomas Zadvydas

 

IPO market: low expectations for 2H20 rebound

The second half of 2020 is primed to see IPO activity pick up after a sluggish start to the year.

But keep expectations low.

A minefield of potential problems may blow up even the best-laid IPO plans, as the deadly COVID-19 virus continues to circle the globe while a contentious campaign for the US presidential election looms.

Despite a backlog of IPO-ready technology companies waiting for the right window to list their stock on the NYSE and Nasdaq, many of them have strong balance sheets that allow them to stay private longer.

That is what played out in the first half 2020 when 15 computer, electronics and software firms priced IPOs on US stock exchanges – nearly half the number seen in the first half of 2019, Dealogic data shows.

Ten of the 15 technology companies that went public in the last six months are headquartered in China.

VroomShift4 PaymentsZoomInfoSelectQuote, and Schrodinger were the only firms from the US.

One well-known name, online gambling portal DraftKings, chose to forego an IPO altogether. It instead went public through a combination with a blank-check company in a deal valued at more than USD 6bn. Another high-profile name – self-driving car technology company Velodyne Lidar – also chose a USD 1.8bn reverse merger with a special purpose acquisition vehicle, which showed the popularity of SPACs compared to traditional IPOs in the current climate.

Despite the uncertainty, the IPO pipeline is beginning to unclog as the calendar flips to July.

US healthcare technology company Accolade kicked off the third quarter raising USD 220m in its market debut last week. Two Chinese companies – LGBTQ online portal BlueCity Holdings and workforce solutions provider Quhuo – are teed up for USD 85m and USD 30m listings, respectively, as soon as this week. Next week, Wilmington, North Carolina-based cloud banking software provider nCino is expected to raise USD 175m in its Nasdaq debut.

Meanwhile, data warehousing firm Snowflake and Apollo Global Management-backed managed cloud computing company Rackspace have S-1s confidentially on file with the SEC without firm dates for when they expect to launch their listings.

Palantir Technologies on Monday (6 July) announced it had confidentially registered its IPO paperwork with the SEC and said a public listing is expected after the SEC completes its review process, subject to market conditions.

The most widely anticipated IPO in the tech industry is Airbnb, which publicly stated its desire to go public in 2020 before the pandemic hit. More recently, the CEO said its IPO timing is up in the air.

— Troy Hooper

Venture capital: investors defend their best portfolio companies

When COVID-19 changed the country in March, some expected venture capital funding to drop through the floor. However, as Instacart’s recent USD 225m raise last month can attest, that did not occur.

Mergermarket data shows VC funding dipped in March and April before recovering to January’s pre-COVID levels in May and June. More interestingly, VC firms wrote even bigger checks to fewer firms: the USD 12.3bn raised in 1H20 almost matched the USD 12.5bn multi-year high reached in 1H19, even as the number of companies receiving that money dropped by nearly a quarter.

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That is not to say the world of venture capital has not changed.

“COVID-19 has made us shift to a more defensive mindset,” said Yash Patel, general partner at Telstra Ventures.

A full-blown portfolio analysis was done after COVID-19 hit as financial metrics were looked at, forecasts revisited and companies tried to figure out a way to cash flow breakeven, he said.

Patel said some of the investments that still intrigue venture capitalists are things related to gaming – with so many people still at home – health and wellness and edtech, which took off during the crisis.

“Valuations have come [down] a little,” said Marcus Bartram, founder and general partner of Telstra Ventures. “The bar also is higher.”

One issue many VCs have mentioned is the inability to have face-to-face meetings with entrepreneurs. A lot of investments have been with people firms already knew and had some sort of relationship with before the crisis, said Bartram, who invests in cybersecurity.

However, not all firms may be conducting business as usual. One CEO who closed a financing round during the pandemic said the round’s lead investor – a California-based firm – told him his company would be only one of two new investments for the firm. It usually does 10 such investments annually.

Investors point out every downturn – the dotcom bust, 9/11 and even the Great Recession – has produced iconic companies, such as Twitter [NYSE:TWTR] and Facebook [NYSE:FB] during the economic downturn of 2008.

Investors will continue to eye companies, especially those in telemedicine, remote learning and work from home technologies, in hopes of finding that next iconic company.

— Chris Metinko

 

Debt: tech firms turn to debt amid lower valuations 

Debt is another option many technology startups have eschewed in the past but are increasingly adopting as founders do not want to dilute ownership at lower valuations during the pandemic.

While the current health crisis did not necessarily cause the increased taste for debt, it certainly sped up its acceptance.

“Irrespective of COVID-19, there has been a secular change,” said Blair Silverberg, CEO at Capital, a firm that helps companies secure venture debt. “The crisis is just accelerating this change.”

The venture capital market is nearly 20 times bigger now than during the initial technology boom in the mid-1990s, said Silverberg. Its prevalence has made many in the sector think equity is the best and maybe only way to finance a company.

However, Silverberg points out that nearly 30% of the capital base of companies on the S&P 500 come from debt. In contrast, only about 2% of early stage companies’ capital base is debt.

“It’s just a cultural variable, everyone thinks in terms of equity,” said Silverberg.

Debt has been fashionable for years for technology companies usually as a late stage financing option. However, more technology companies – especially in fintech – are looking at it as an alternative to earlier financing rounds.

In July 2019, Seattle, Washington-based digital remittance company Remitly raised USD 220m in new financing, including USD 85m in syndicated debt financing. Last December, San Francisco-based credit card issuer Brex secured USD 200m in debt capital from Credit Suisse.

But it’s not just fintech firms. San Francisco-based lodging marketplace Airbnb raised USD 2bn in debt and equity from Silver Lake in early April.

Last month, Palo Alto, California-based corporate travel and expense management platform TripActions raised USD 125m in a convertible-to-IPO financing led by Greenoaks Capital with participation from Vista Credit Partners, the credit-lending arm of Vista Equity Partners.

Silverberg’s firm, Capital, is seeing a wide breadth of companies coming to it to explore debt options, said Silverberg. From food delivery services growing fast and needing capital to even those in distress, everyone is looking at non-equity options, said Silverberg.

For convertible debt, Dealogic shows 47 deals listed under computer, electronics and software in 1H20. Notable names include CoupaZscalerEventbriteRealRealZendeskPalo Alto NetworksSplunkHubspotDatadogTeladocLyft, ChewySnapSlack, and Square. Many of those were in June.

–Chris Metinko

Analytics and Graphics by Philip Segal in New York
Mergermarket

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