By Bill Bowler, Opus Connect
The rapid evolution of technology in M&A continues to reshape the industry, presenting both opportunities and challenges for investment bankers. AI in particular has added layers of complexity to traditional processes – it has revolutionized the way companies operate, scale, and position themselves in the market, creating an entirely new playing field for investors and dealmakers. With advancements come uncertainties, however – how do you evaluate a company with rapidly changing AI capabilities? How do you measure sustainable growth versus short-lived hype?
To better understand these challenges and opportunities, we spoke with three leading investment bankers who specialize in technology-focused transactions. Randal Stephenson, Ben Boissevain, and Jim Hageman bring decades of experience to the table and provide insights into how the rapid evolution of technology in M&A is reshaping the criteria for evaluating deals, the art of client selection, and the fluid nature of valuations.
New AI Dynamics:
One of the most transformative forces in recent years has been artificial intelligence (AI). What was once a niche topic has now become a cornerstone of innovation and strategy. Randal Stephenson, Chief Executive Officer and Head of Investment Banking at FE Capital Markets, LLC highlights the volatile nature of the industry.
“AI, like all technology, is constantly evolving, and with that evolution valuations have changed. Just a few years ago, you only had to whisper the term “AI” and investors threw money at your feet. Today, AI has become ubiquitous, there is truly proprietary, valuable AI and there is run-of-the-mill AI and we’re already seeing valuations start to taper off sharply on the latter. The valuation honeymoon is almost over now for unexceptional AI businesses.”
The shift in AI’s prominence has not only created a sense of urgency among companies but has also influenced how they position themselves in the market. Ben Boissevain, Founder and Managing Partner at Ascento Capital, LLC offers his view.
“All companies have to reconsider their AI capabilities. It’s either build or buy. If the company has some AI focus, and is a large language model company, those are far and few between.”
Criteria for Working With a Client:
For investment bankers, selecting the right clients is a crucial part of their success – careful vetting is essential to ensure that only the most promising opportunities go forward. Stephenson and Boissevain share their approach to evaluating potential clients.
“We go through three to four candidate companies a day that we review and then decide whether to take them on” says Stephenson. Boissevain adds “I have taken cases where a company is not really sold for its financials. It’s more for its technology.”
Jim Hageman, Managing Director at Sett & Lucas also outlines his structured methodology for assessing potential deals.
“We prepare a scorecard with three years of past financial data plus one or two years’ projections. We’ll also go through a Q&A session to make sure we understand the quality of revenue. The scorecard will give the tech company a realistic valuation using discounted cash flow, public transactions, and pertinent transactions. We’ll come up with a pretty good figure that will hold water if we take them to market.”
Changing Valuations:
In a rapidly evolving industry, valuations can be highly dynamic and unpredictable. Stephenson and Boissevain observe that new technologies often experience a short-lived period of intense interest before the market adjusts.
Stephenson mentions “New technology typically has a 24-48 month window where the true market potential of the technology is uncertain and valuations are more aspirational. People overpay, with time technology diversifies and improves, and then investors realize not all tech is the same and they end up picking winners and losers in that industry vertical.” At the same time, certain sectors have more predictability in terms of valuations. Boissevain also suggests “there’s other sectors that have been around forever and are more predictable – ERP is a good example.”
The SaaS industry also exhibits unique valuation characteristics according to Hageman.
“When it gets into SaaS software companies that trade on revenue multiples, we will look as low as three million on annual recurring revenue. Profitability is not so much as important as growth capabilities and rule of 40 when it comes to software-type companies.”
While innovation drives the technology industry forward, it also demands a keen eye for distinguishing lasting value from fleeting hype. Those who adapt their strategies will remain at the forefront of the rapid evolution of technology in M&A.
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