Think beyond the acquisition

Steve Perkins welcomes the technology sector's focus on long-term growth

The technology sector is riding the crest of a wave. We interview approximately 150 technology companies around the world every quarter through our International Business Report (IBR) and what’s struck me since the beginning of the year is how bullish the leaders of these companies are about their growth prospects.

A quick look at the survey results tells us that tech businesses are more confident about growing profits over the next 12 months than their counterparts in any other sector; 60% expect profitability to rise, well above the global average (45%). At the same time, hiring looks set to increase dramatically with net 47% expecting to hire workers in the year ahead, up from 34% this time last year and well up on the global average (35%).

So what’s driving this optimism around growth? Certainly at the macro level, greater economic certainty breeds confidence and risk-taking. However, this improvement in business sentiment has coincided with a bumper period of listing and merger activity. The sector has dominated M&A headlines in recent months with Apple buying Beats, Facebook’s purchases of Oculus Rift and WhatsApp, and the IPOs of Chinese firm JD.com and Airbnb as notable examples.

While this activity is welcome, there is always the danger of the market overheating. Echoes still ring in our ears of the dotcom bubble bursting at the turn of the century with analysts warning that online retailers are overvalued compared to traditional retailers following the recent flotations of AO.com and Alibaba, which has been valued at over US $200 billion. The sector cannot rely on listings and mergers or profitability engineering through cost cutting, efficient tax structuring and stock buyback. To ensure continued growth – sustained top line growth is needed.

It’s therefore encouraging that investment plans of tech businesses globally look healthy. The IBR finds 40% of businesses expecting to spend on R&D (the global average is 28%) and 37% planning to invest in plant and machinery over the next 12 months. Large technology companies are beginning to loosen the large stockpiles of cash they have amassed. This shows that business leaders are remaining focused on strategies to sustain growth beyond the short-term boost that a listing or a merger can provide, looking for potential revenue streams over the years ahead.

Mergers and acquisitions can help companies enter new markets, expand product portfolios or acquire scarce engineering talent. And while merging or acquiring another business may seem the quick way to access a new technology or client base, the integration of two different business models, cultures and operations can be long and difficult. Similarly, earlier stage companies looking to the capital markets to scale their businesses should be cautious about the siren call of easy money. There are many ways of accessing finance aside from IPOs that might be more suitable to a company’s growth trajectory.

At some point this wave will crest and crash on the beach. When the wave of optimism breaks, those businesses with a balanced approach to expansion won’t be left high and dry.

Steven Perkins is global leader for technology at Grant Thornton.