M&A in the comms sector remains active despite high interest rates and an uncertain economy, reported Knight Corporate Finance Director Adam Zoldan in his Comms Vision keynote. "This amazing dynamic channel has rolled with the punches and evolved," he said. "However, higher interest rates are still affecting some acquirers' ability to buy."
Although not a showstopper for acquisitions in the comms sector, interest rates have nevertheless had an impact on deal numbers and their value – but Zoldan says the appetite for PE firms to invest into comms and IT firms is still sharp. "PE deals have driven consolidation and we have seen no reduction in their desire to invest," he added.
Market conditions have however led to lower levels of SBO activity over the past year, creating a pent-up pipeline that Zoldan expects to unblock over the coming months. "Secondary buyouts have dipped with only one in the comms sector during the past 12 months (Focus Group)," stated Zoldan. "I suspect others are in progress but have not made it through because of higher interest rates which has increased pressure on the sector. With some fine tuning they can get ready for sale so we expect the number of secondary buyouts to increase."
Zoldan also noted that, in the main, acquisition war chests are based on debt, which means that equity has got smaller therefore some investors are holding off from selling. But smaller deals are progressing at circa 20 a month, observed Zoldan, noting that high interest rates are having less of an impact at this level. "It's been an interesting and positive year with plenty of funding and we see the debt markets opening up," added Zoldan. "There remains a good pool of buyers and we continue to create competition for the best deal. Buyers are more selective but the best deals ase getting the higher valuations."
Other macro factors identified by Zoldan include Budget changes which he says impact the value of smaller deals by a multiple of one. But overall he says the outlook for M&A in the sector is positive with 'plenty of funding'.
While Zoldan expects an upswing in comms sector dealmaking he also pointed to an increase in the due diligence load. "Buyers check absolutely everything which adds weeks to the execution phase," he added.
The value drivers continue to be company size and growth, while recurring revenues are 'extremely important', noted Zoldan. He's also observed a focus on being narrow and able to articulate what a reseller does quickly, and not be a jack of all trades. "When you go to market ensure that every aspect of your business carries value," added Zoldan.