Deal Making in an Evolving Landscape: A Recap of Clearsight’s Digital Innovation Summit M&A Panel Discussion

At this year’s Virtual Digital Innovation Summit, Clearsight’s M&A panel brought together thought leaders from across the digital transformation sector to discuss Deal Making in an Evolving Landscape. Philo Tran, Managing Director and Head of the Digital Transformation practice at Clearsight, moderated the panel that included Prasad Chintamaneni, Managing Director at New Mountain Capital; Tim Crowhurst, Head of Corporate Development at Cognizant; William Fleder, Managing Director at Tailwind Capital; and Stephanie Schnabel, Corporate Development Lead at KPMG. The experts discussed the unexpected challenges and successes of deal making during a pandemic and how digital transformation businesses can best position themselves for transacting in 2021.

M&A During COVID

Mr. Tran opened the panel with the question that loomed large in 2020: how did each of the panelists’ firms respond to the global shutdowns beginning in March and how successful were they in switching to digital work in the human-contact-centered world of mergers and acquisitions? For both strategic and private equity acquirers, their primary focus was on reaching out to and supporting their portfolio companies and subsidiaries to ensure a successful transition to virtual. Mr. Fleder discussed how Tailwind made a point of reaching out to their CEOs, CFOs, and heads of HR to proactively address operational and financial challenges. These efforts made an impactful difference in the long run of the crisis and strengthened relationships across the board. Of course, the timing and degree of COVID’s impacts on business operations depended in large part on geography. As a global company, Ms. Schnabel discussed how KPMG heard early rumblings of COVID’s effects on East Asian markets and had to adjust their posture and resource allocation accordingly, paying particular attention to where the virus was challenging their partners and offices most. Across the panel, all reported a slowdown in deal activity throughout Q2 2020 with a remarkable surge in Q3 2020. The panelists’ experiences were consistent with Clearsight’s remarkable deal flow in 2020.

One of the biggest challenges the panelists faced while completing deals in 2020 was travel restrictions and the reliance on virtual meetings to build relationships. Undoubtedly, creativity was essential for closing deals in 2020 and the panelists shared how they adapted. Mr. Chintamaneni discussed these challenges in terms of diligence requests that had to be completed on-site in Asia. To fulfill these requests, New Mountain utilized on-the-ground partners who conducted site audits and helped finalize the process. As virtual logistics for due diligence, management meetings, and pitches smoothed throughout 2020, several panelists noted a shift in how they invested their time and remarked how much more of their schedule was optimized, for worse or better, without needing to factor in travel time. While some aspects of the deal making process were well-suited for virtual, Mr. Fleder and others also grew to better appreciate how essential in-person relationship building is for finalizing a transaction. While none of the panelists expect travel to return to pre-pandemic levels, all believed in-person meetings will continue to be critical for developing successful strategic partnerships.

Convergence in Digital Transformation

As M&A professionals focused on data, cloud, and software spaces, the panelists shared their thoughts on trends in the digital transformation market and applications to other industries. As Head of Corporate Development for one of the largest multinational technology companies, Mr. Crowhurst remarked that the convergence of professional services and technology that has become a dominant trend in the market over the last decade will continue to grow as business seek to take full advantage of operational and consumer preference data. According to Mr. Crowhurst, the complexities of IT integration businesses are facing are growing and will necessitate the marriage of advanced technology and professional services firms who can help businesses fully realize the technology’s value. Ms. Schnabel added that technology acquisition by professional services firms will be driven by client demand and the desire of businesses to fully understand how they can utilize consumer data to grow. Both Mr. Crowhurst and Ms. Schnabel agreed that there remains room for investment and exponential value creation across industries.

When the panelists were asked which industries they are most excited about investing in for 2021 and beyond, the convergence of digital transformation and tech-enabled services remained an area of great interest due to its far-reaching applicability. For Mr. Fleder, the stress COVID put on global supply chains was further proof of the advancements digital transformation investments could have in the space by successfully managing and analyzing supply chain data. While InsurTech, life sciences, and ecommerce were all noted as areas to watch, Mr. Crowhurst emphasized that every sector can benefit by investing in tech-enabled services. The panelists shared optimism about the direction of the market in 2021 as more sectors seek to utilize software and technology to improve their processes.

Outlook and Advice for Sellers     

Clearsight’s Digital Innovation Summit brought together not only M&A professionals, but entrepreneurs and business owners of high-end technology and professional services firms. The panel shared some advice for business owners at every stage of growth who are considering a near or long-term liquidity event. Recognizing the stress COVID put on many businesses, both Mr. Fleder and Mr. Crowhurst emphasized the willingness of acquirers and investors to take a holistic view of a company’s performance and growth, despite financial or operational speedbumps in 2020. The impact a speedbump will have on the company’s ability to receive a growth investment or be acquired will vary based on the size of the disruption, how the owner(s) responded, and what plans they have in place for future disruptions. If a business is able to demonstrate resilience in the face of wide-scale disruption, or show how they provided solutions that were in high demand by COVID-age consumers, they could see a major benefit to their valuation.

Despite the unprecedented M&A market of 2020, some advice for sellers and investment seekers remains the same. Ms. Schnabel remarked that she continues to evaluate companies in terms of their strategic, operational, and financial wellbeing. Strategically, the focus is on a business’ proximity to the customer and their needs. Are they providing unique and relevant solutions to customer pain points? Operationally, what risks or logistical challenges does the business face that could hinder future growth and successful utilization of capital? Specifically, COVID and the shift to virtual work emphasized that every business must have a robust data and cybersecurity posture to protect operations. Financially, very few businesses are undervalued, so acquirers and investors are seeking businesses that will deliver on the promises of the market’s higher-than-average valuations. Mr. Chintamaneni agreed, saying investors and acquirers are eager to take full advantage of the well-valued businesses on the market, with no one knowing when the music will stop, and the market will slow. He added that it is also important for those investors and acquirers to critically consider how their targets will utilize the added capital to grow and achieve their full value proposition in the varied landscape of tech-enabled services.

Clearsight was honored to host the panelists and facilitate this discussion about COVID’s impacts on M&A and the promising market ahead for tech-enabled services firms in 2021. If you would like to hear more about Clearsight’s Virtual Digital Innovation Summit, the panelists, or to discuss what we’re seeing in the M&A market, please do not hesitate to reach out to ptran@clearsightadvisors.com.