While facing a pandemic affected the technology industry, it fared somewhat better than others, as merger and acquisition activity shows, according to the Q2 Decision Point Quarterly report. A key take-away is that movement toward virtual and cloud environments may become the new normal.

Still, April and May saw the lowest number of deals in the tech M&A since Q1 in 2009 during the Great Recession. The report attributes the decrease in part to a wide gap in valuations between sellers and buyers. Deal activity and M&A processes increased in June and deals are starting to pick up in the tech sector, according to the report.

Some sectors, such as fintech, food delivery offerings, and work-from-home solutions have had significant growth in demand, sparking acquisition interest. The technology industry has not been hit nearly as hard by coronavirus as other sectors of the economy. The pandemic has allowed some areas within technology to prosper from the shift towards remote work. Companies with solid recurring revenue models have been less impacted by the economic slowdown. Those with a workforce that can easily shift to work-from-home policies are seeing increased interest from strategic and financial buyers.

Two-thirds of organizations surveyed by 451 Research expecting to continue work-from-home policies “long term or permanently.” Andy Agrawal, in an exclusive interview with WRAL TechWire, said that even after the pandemic fades, “I bet a lot of the business world will be doing things differently.”

Even in a pandemic, ‘Good deals get done’ says Charlotte M&A exec

Agrawal said all three of his children, who are in their 20s, are working virtually selling software and plan to continue virtual work until the end of the year. “Everybody realized they need to be able to do things virtually.” He noted that some traditional industries like big banks, not used to doing things virtually, discovered a lot of people can work successfully from home.

Going forward, he noted, that has implications for potential savings on infrastructure such as office space.

The report suggests that technology firms who have quickly adapted and are able to maintain robust business development initiatives and remote product development will prosper.

In considering specific industry segments, the report said:

The SaaS industry deal count decreased from 199 in Q2 2019 to 157 in Q2 2020, reflecting the impact that Covid-19 has had on the SaaS industry. SaaS M&A activity in Q2 reflected a higher percentage of distressed deals than typical, with many companies forced to take deals due to lack of liquidity.

The emergence of Covid-19 in Q1 forced many employers to embrace a remote working environment in Q2. This caused a surge in the number of users on video and audio telecommunication platforms. M&A also reflected this increased demand with Verizon announcing its acquisition of BlueJeans for 400 million. Verizon hopes to use the BlueJeans’ video conferencing to expand their B2B services and believes the BlueJeans platform will be beneficial to their 5G roadmap.

According to Data Pine, a software engineering company, one of the growing trends in the SaaS environment is micro-SaaS companies’ evolution. The smaller niche-focused SaaS offerings have begun to emerge with more of them expected in the industry.

Internet Software and Services

Despite the continued spread of Covid-19 in Q2, the M&A deal count was not significantly impacted in the internet content and commerce sector. The sector had 100 deals and $19b in deal value, up from 90 deals and $7 billion in deal value in Q2 2019.

In Q1, the online food delivery services market began ongoing consolidation of leading market players. With the spread of Covid-19, the food delivery industry continued its rapid growth. Just Eat announced its acquisition of GrubHub for $7.3 billion.

Shortly after the announcement, rumors began to spread about Uber potentially acquiring Postmates.

Ecommerce prospered as eBay underwent incredible growth in Q2 of 2020 due to the migration from physical storefronts to e-commerce caused by Covid-19. The company’s stock soared from $28 on April 1st to $52 on June 30th, with the company raising revenue and EPS guidance for Q2.

Schools were forced to shut down and students had to switch to virtual learning immediately. This move required the eLearning industry to rapidly scale around the globally increased demand. Buyers in Q2 noticed the market opportunities with Chegg announcing its intent to acquire Mathway for $100 million.

Enterprise Software

451 Research recently published Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey June 2020, under which 48% of respondents reported that their organization is currently experiencing lower customer demand due to COVID-19. Also 60% of respondents indicated that coronavirus has reduced their company’s access to clients and prospects.

Technavio, a global research and advisory firm,  believes that these companies will focus on the fast-growing cloud segments during the COVID-19 pandemic to promote growth.

The report notes that the coronavirus pandemic has increased the occurrence of phishing attacks (the second most cited pain point in 451 Research’s end-user studies). Attackers are targeting employees who are currently struggling to find new ways of accessing enterprise resources.

Business Intelligence Software

In Q2 2020, the business intelligence sector did not experience a change compared to Q2 2019 in terms of deal flow. In both Q2 2019 and 2020, there were a total of 33 deals completed.

United States retailers saw a 68% year over year growth in E-Commerce as of Mid-April.  They are turning to dynamic pricing to drive sales and increase margins. According to Quantzig, dynamic pricing models help companies determine the optimal price for products based on current inventory availability, market saturation, and customer demand.

According to 451 Research, tighter corporate budgets resulting from the pandemic will slow the pace of innovation in the analytics software sector and may negatively affect sales. Instead, corporations will focus on investments in conventional and proven techniques for business decision-making.

Infrastructure Software

While many businesses experienced short-term disruptions in demand due to COVID-19, 451 Research believes that most trends within the applied infrastructure segment will persist and possibly accelerate from the need to work remotely. For example, the cloud-native crossover trend will not experience disruption as teams within large organizations continue to seek cloud-native advantages during the pandemic, including agility, efficiency, and portability.

IT Services

Growth in the IT Services industry will be primarily fueled by digitization trends. It will prompt large organizations to improve their IT infrastructure, thereby helping to optimize the business operations, minimize waste, and increase organizational revenues.

Accenture has continued its growth strategy by remaining extremely active in the IT Services M&A market. Accenture acquired six more firms in the second quarter, including Revolutionary Security, a security integration service.

Hosted and Managed Services

Once again, movement to the cloud is predicted. The managed services industry is moving away from on-premise solutions with 57% of managed service providers (MSPs) projecting that critical on-premise client workloads will move to the cloud in the next 3 years. The shift marks the growing adoption and acceptance of cloud-hosted solutions by enterprise customers.

Datto’s Global State of the MSP Report showed MSPs have continued to find opportunities for growth during the Covid-19 pandemic. Almost 40% of MSPs reported annual revenue of $2.5M as these providers continue to be of critical importance to small and medium businesses. MSPs have continued to find opportunities for growth in cloud adoption and increasing automation in IT environments.

IT Services Outsourcing

In Q2 2020, the IT outsourcing sector increased the number of deals with 31 deals from 29 deals in Q2 2019. However, the total value was down significantly to $16M from the total deal value of $5b in Q2 2019. The significant decline in total value is due to less public deals in Q2.

Covid-19 continues to impact the delivery process of IT outsourcing in Q2 2020. Outsourcing workers have not fully returned to the office after being sent to work from home in Q1 of 2020 in India. Companies have been distracted trying to ensure that their employees have the tools necessary to work from home. Covid-19 has presented new tactical issues and opportunities that have not been seen before, especially in ensuring privacy and security measures.

With more reliable security measures enacted, industries are becoming more confident in moving their confidential information to outsourced IT developers. Industries such as healthcare and financial services are some of the most recent to begin gaining this trust with outsourcing after the progression of security measures.

Hosted and Managed Services

The managed services industry is moving away from on-premise solutions with 57% of managed service providers (MSPs) projecting that critical on-premise client workloads will move to the cloud in the next 3 years. The shift marks the growing adoption and acceptance of cloud-hosted solutions by enterprise customers, putting pressure on MSPs to optimize their digital transformation offerings for the cloud.

MSPs have continued to find opportunities for growth in cloud adoption and increasing automation in IT environments. Emerging technologies, namely 5G technology and faster wireless networks, also provide MSPs future growth opportunities.

IT Staffing Services

In Q2 2020, the IT outsourcing sector increased the number of deals with 31 deals from 29 deals in Q2 2019. However, the total value was down significantly to $16 million from the total deal value of $5 billion in Q2 2019.

The hiring market is showing signs of stabilizing. A CompTIA report found that only 25% of technology companies were postponing interviews in June compared to 32% in April. The report also found that 14% of the firms surveyed were planning to onboard new staff in June.

An executive order in June suspended the entry of foreign workers with H-1B visas through 2020. The suspension was put in place to protect American workers at this time of high unemployment. Mark Roberts, CEO of TechServe Alliance, claims that this will be a “longer-term obstacle” for IT staffing firms trying to meet demand as the order only affects visa holders who are not already in the country.

Value Added Reseller Services (VARs)

Cloud-based communication solutions have become extremely important during the Covid-19 pandemic for many companies who previously relied on legacy, on-premise systems due to stay-at-home orders and social distancing. Going forward, VARs will continue to find opportunities in helping customers make transitions in their technology and IT systems.

Strategic partnership opportunities will be a significant driver of growth going forward for VARs.