Software, Media and Technology: Valuation and Trajectory

Overview & Valuation

The Software, Media & Technology industry has certainly been in sharp focus over the past few years, showing considerable acceleration due the rapid digital transformation catalysed by various COVID initiatives. However, while tech stocks outperformed during the pandemic, the sector has since seen a considerable price correction as the fundamental of future cash generation returned as a key focus for valuation.

With earlier stage businesses facing strong challenges in fundraising unless they can really evidence revenue and profit growth, Polestar has seen good levels of interest from trade buyers with an appetite to acquire technology at more acceptable premiums. This has created demand for attractive solutions built with low levels of technical debt, even some that may be lacking real commercial scale. As ever the skill (or sometimes luck) is in knowing which parties are looking for what to enable the connection.

Valuation metrics have reduced globally, but there is still a lot of funding available for the right investment, with different economies’ views on what looks “cheap” or “expensive” still showing noticeable variations. The right tech solution, able to be sold into a larger customer base can support noticeably higher valuation parameters and Polestar has seen US interest on the majority of our recent deals, alongside other international interest from China, Canada, Europe and Australia.

As most technology stock valuations revert to profit- supported rather than pure revenue metrics, the new kid on the block is Generative AI. This software made its debut in November 2022 with the release of OpenAI’s ChatGPT which set the record for the fastest growing user base in history, gaining 100 million users in just two months. Understandably, this platform now stands above the rest and investors and corporates alike are scrambling to get skin in the game.

To give an idea of the frenzy in the sector, AI start-up Mistral raised £105m just four weeks after the business was founded. Apparently just the words “we’re assembling a world-class team to develop the best generative AI models” is enough to secure a nine-figure seed round these days! However, putting jokes aside, the deal demonstrates how convincing the right management team can be to investors. The three founders are all ex-Meta and Google employees, and their ability to secure such substantial backing at this stage reflects, not only the power of their positioned expertise, but also undoubtedly the desire of European investors to develop their own response to the AI models emerging from Silicon Valley.

Deal Activity

Software & Tech M&A Activity

Over the past 6 months in the UK, there have been 198 reported deals within the Software, Media & Technology broken down as follows:

Of the 198, 77 deals have involved an international acquiror, demonstrating the ongoing international interest in UK business as multiples have remained lower as the UK struggles with inflation and Brexit headlines. Executives at Ares Management, a US private markets giant, even went so far as to comment that “everything in the UK is on sale”. Whilst I am not sure Polestar quite shares this view entirely, with historically strong prices still being paid for good assets, it is certainly true that US buyers still feel UK assets are attractively priced compared to the US.

The revaluation in tech stocks has trickled down into the private markets and international buyers are seeking to opportunistically acquire smaller businesses as well as those with more fully developed business models. This matches with early stage businesses, not able to prove their commercial model, facing increasing challenges in securing funding.

Themes For the Next Twelve Months

For the rest of the tech industry, the situation is slightly more lackadaisical as companies are being forced, like other industries, to weather the current economic slowdown by trimming costs and increasing efficiency to maintain margins on stagnant or declining revenues. Looking ahead, Polestar has identified several key themes which we believe will play critical roles over the next 12 months:

• Sustainability and adapting to new regulations – legislators and stakeholders alike are pushing companies to increase visibility surrounding sustainability/environmental impact and tax. Sustainability particularly has seen significant legislation introduced in recent years including the EU Sustainable Finance Disclosure Regulation (SFDR) for financial market participants and UK Green Taxonomy which requires corporates to disclose the businesses alignment with Taxonomy, along with analysis of how sustainability risks affect their business strategies and financial plans.Recently, at the Orion (Polestar’s international network) confrance in New York, it was clear that the US market is still some way behind the leading areas of UK, Europe, Singapore and Canada, with anecdotal evidence suggesting it is somewhere close to where the UK was 5 years ago. However, do not expect them to take 5 years to catch up – There is much activity already with international funds, which raise investment across border and hence need to comply with regulations in different jurisdictions, investing vast sums in an attempt to catch up.We will undoubtedly continue to see a ramp up in regulation across geographies as politicians, C-suite’s and investors align to define data requirements, giving rise to a new wave of business management software to enable the flow of actionable real-time data.
• Leadership through uncertainty – faced with waning consumer spending, declines in product demand, and falling market capitalisations, consumer-facing tech companies’ are under pressure to increase margins and grow revenues. We have already seen layoffs totalling almost 190,000, driven by the biggest names in tech as well as in startups, but further margin improvement will only be realised as businesses scale (organically or by consolidation through strategic M&A) supported by continued process enhancement and restructuring through intelligent automation and modernisation of legacy architectures.
• Efficiency gains through automation and AI – with rising employee costs and inflation, businesses are under pressure to drive out costs and automate, giving opportunities for tech solution providers. B2B sellers should find a ready market for the best solutions, both from customers and acquirers. Those that can own and manage high quality data sources may have opportunities to accrete value in specific spheres as AI solutions become more targeted.Navigating uncertainties through comprehensive strategy – Companies will strive to develop deeper understanding of interconnected potential risks during the ongoing market turbulence to facilitate more resilient business ecosystems and strategies going forward. Polestar is seeing strong interest from large scale advisory firms in niche consulting and risk advisory businesses able to help their client base navigate such risks. Again, automation and data management, alongside network reach, are key drivers of value.Content hungry media – Consolidation is continuing apace as the battle for content ownership rages on. Digital media operators are seeking to control large catalogues to address the power imbalance with broadcast platforms in the increasingly competitive landscape of producers and distributors. Consequently, competition is also evident in the M&A market as players battle to secure sole rights to content and, critically, to staff with the ability and contacts to create such content going forward. Recent Polestar activity in this area has focused on both the value of the target portfolio and the retention of key creative personal to develop more content post transaction.
• Navigating uncertainties through comprehensive strategy – Companies will strive to develop deeper understanding of interconnected potential risks during the ongoing market turbulence to facilitate more resilient business ecosystems and strategies going forward. Polestar is seeing strong interest from large scale advisory firms in niche consulting and risk advisory businesses able to help their client base navigate such risks. Again, automation and data management, alongside network reach, are key drivers of value.
• Content hungry media – Consolidation is continuing apace as the battle for content ownership rages on. Digital media operators are seeking to control large catalogues to address the power imbalance with broadcast platforms in the increasingly competitive landscape of producers and distributors. Consequently, competition is also evident in the M&A market as players battle to secure sole rights to content and, critically, to staff with the ability and contacts to create such content going forward. Recent Polestar activity in this area has focused on both the value of the target portfolio and the retention of key creative personal to develop more content post transaction.