While automation and modernization result in long-term benefits like efficiency and scalability, recent labor market challenges, supply chain disruptions, and inflation have intensified the need to do more with less. Technology in all of its forms will continue to be the key lever in those efforts, even if economic conditions deteriorate. In fact, the pervasiveness of technology across sectors, geographies, and price points provides valuable protection against market shifts.
2023 Outlook - January 12, 2023
Technology is ubiquitous in today’s economy, with nearly every industry and sector rapidly adopting software as part of digital transformation and modernization initiatives. Here, senior professionals from the Harris Williams Technology Group discuss the key trends powering M&A in the industry, the subsectors to watch throughout 2023, and shifting buyer and seller dynamics.
Which trends will be creating M&A opportunities in technology in 2023?
The most powerful trends today are the same ones that have been creating opportunities for M&A for several years. Companies around the world and across the economy are automating more core business processes and seeking greater visibility into and connectivity with their customers and trading partners. Technology is at the heart of all these goals.
The pervasiveness of technology across sectors, geographies, and price points provides valuable protection against market shifts.
From a thematic standpoint, we expect companies that demonstrate a balanced profile of strong growth and profitability to continue to receive disproportionate attention in the near-term M&A market. Investors and strategic acquirers are placing greater value on profitability today than they did when bullish macroeconomic indicators were more prevalent a few quarters ago.
Which technology subsectors do you think will be most active throughout 2023?
Horizontal Software
Infrastructure software is another important subsector that will be very relevant this year, as it helps businesses optimize their IT infrastructures to ensure better visibility into their systems' performance, integrity, and cybersecurity.
Separately, in the wake of the pandemic, labor-intensive sectors such as law firms and legal functions, which have been resisting change, are now under pressure to accelerate their digital transformation to drive further automation and efficiency. With a significant increase in legal technology spend, we expect M&A activity to remain strong in this sector.
Vertical Software
ESG will continue to be a significant influence in the market, creating growth in areas like EHS compliance, corporate risk mitigation, workforce development, and training, which help global companies meet regulatory requirements and improve the safety and sustainability of their operations. Industrial technology— software, sensors, automation, and machine learning—is aligned with ESG and is likely to also benefit from an increasingly competitive market environment as companies seek to operate more efficiently.
We also expect organizations to invest more in their supply chains. As we saw during the COVID-19 pandemic, many organizations were unprepared to rapidly adapt their supply chains to respond to increased consumer demand. Software businesses that help organizations bring products to market faster and provide insight into all aspects of the supply chain will experience heightened demand from both financial and strategic acquirers.
Horizontal Software
Infrastructure software is another important subsector that will be very relevant this year, as it helps businesses optimize their IT infrastructures to ensure better visibility into their systems' performance, integrity, and cybersecurity.
Separately, in the wake of the pandemic, labor-intensive sectors such as law firms and legal functions, which have been resisting change, are now under pressure to accelerate their digital transformation to drive further automation and efficiency. With a significant increase in legal technology spend, we expect M&A activity to remain strong in this sector.
Vertical Software
ESG will continue to be a significant influence in the market, creating growth in areas like EHS compliance, corporate risk mitigation, workforce development, and training, which help global companies meet regulatory requirements and improve the safety and sustainability of their operations. Industrial technology— software, sensors, automation, and machine learning—is aligned with ESG and is likely to also benefit from an increasingly competitive market environment as companies seek to operate more efficiently.
We also expect organizations to invest more in their supply chains. As we saw during the COVID-19 pandemic, many organizations were unprepared to rapidly adapt their supply chains to respond to increased consumer demand. Software businesses that help organizations bring products to market faster and provide insight into all aspects of the supply chain will experience heightened demand from both financial and strategic acquirers.
Healthcare is another end market to watch—there's significant runway to automate processes and boost visibility across the value chain, and demand for software, data tools, and tech-enabled solutions will remain strong.
How are buyer and seller dynamics changing in your industry?
One shift is the relative activity levels of strategic buyers and financial investors. We’re seeing a pronounced trend toward strategics being better able to compete than in past years, which is a function of both value normalization and a more disciplined approach among financial investors.
For their part, private equity groups are intensely focused on growing, recession-resistant technology and software companies, creating scarcity premiums for the true market leaders. This is especially true in Europe, where there are fewer technology companies than in North America. Regardless of geography, the key fundamentals of the business are increasingly being scrutinized and benchmarked as buyers focus on identifying and pursuing those true market leaders.