As Competition Persists, M&A Risks Prevail Within Tech Industry – BDO Report

May 2015

Amanda Chun
Bliss Integrated Communication
(212) 584-5482

CHICAGO – May 27, 2015 – Intense competition continues to be the most prevalent risk in the technology sector, particularly amid constant innovation and improvement. According to the eighth annual report from BDO USA, LLP, all of the 100 largest public tech companies in the U.S. cite risks related to competition and consolidation in their annual filings. Increasingly, competition is flowing into employment trends as hiring becomes a top priority for many managers at leading tech firms. As such, 95 percent of companies mention concerns over their ability to attract and retain key personnel, up from 89 percent in 2014.
The 2015 BDO Technology RiskFactor Report, which analyzes the most recent SEC 10-K filings of the 100 largest publicly traded technology companies, also found that businesses are increasingly highlighting M&A risks, specifically those relating to the successful completion and integration of  current or future transactions, in their filings (99 percent of companies, up from 94 percent last year). This elevated awareness of M&A risks seems to be on trend with the previously published 2015 BDO Technology Outlook Survey, which noted that 96 percent of tech finance chiefs expect M&A activity will increase or stay the same this year. As deal pace and volume increase, such companies become exposed to higher risks as well.
"Opportunities abound in the tech industry, so much so that companies are fiercely competing with one another to develop and introduce innovative products at a rapid pace while maximizing efficiency," said Aftab Jamil, partner and leader of the Technology and Life Sciences Practice at BDO USA, LLP. "More companies are turning to acquisitions as a critical element of their strategies to enhance their technology and product offerings, which brings other challenges to the forefront, such as managing the integration of acquired businesses, international growth, complying with new regulations and mitigating additional risks by maintaining appropriate internal controls."    
The following chart highlights the top 25 risk factors cited by the 100 largest technology companies in the U.S.:
2015 Rank Risk Factors 2015 2014 2013 2012
1. Federal, state or local regulations 100% 98% 96% 98%
 1t. Competition in the tech industry, pricing pressures 100% 99% 95% 99%
 3. Management of current and future M&A and divestitures 99% 94% 88% 88%
 4. Threats to international operations and sales 96% 89% 82% 85%
 4t. Breaches of technology security, privacy or theft 96% 91% 81% 71%
 6. Failure to properly execute corporate strategy 95% 91% 87% 88%
 6t. Ability to attract or retain key personnel 95% 81% 80% 82%
 8. U.S. general economic conditions 94% 95% 92% 98%
 9. Corporate copyright, IP infringement, trademark violations 93% 88% 79% 80%
 9t. Legal proceedings, litigation 93% 91% 74% 83%
 11. Accounting, internal controls and compliance standards 92% 79% 65% 69%
 12. U.S. and foreign supplier/vendor and distribution concerns 90% 93% 84% 88%
 12t. Predicting customer demand and interest, innovation 90% 92% 83% 91%
 14. Failure to develop or market new products or services 89% 84% 75% 93%
 15. Ability to maintain or implement operational infrastructure 87% 79% 71% 73%
 16. Natural disasters, war, conflicts and terrorist attacks 86% 89% 75% 88%
 16t. Equipment failure and product liability 86% 82% 69% 80%
 18. Indebtedness 72% 74% 65% 50%
 19. Cyclical revenue and stock fluctuation 69% 70% 62% 76%
 20. Inability to acquire capital, credit ratings 68% 74% 57% 69%
 21. Goodwill impairment 67% 57% 39% 31%
 22. Labor concerns 64% 83% 55% 56%
 23. Failure to comply with FCPA, anti-corruption and anti-bribery laws 58% 48% 29% N/R
 24. Environmental or health compliance and liability 56% 52% 46% 48%
 25. Seasonality/cyclicality 55% 55% 34% 43%
  *t indicates a tie in the risk factor ranking                
Additional findings from the 2015 BDO Technology RiskFactor Report include:
Security risks rising through the ranks since 2009. Data security risks are nearly ubiquitous after a near-meteoric rise in the number of businesses disclosing concerns since 2009 (96 percent this year, versus 30 percent in 2009). With companies on edge about security breaches, many are also apprehensive about corporate copyright, intellectual property infringement and trademark violations (93 percent).  
As data breaches become more common, companies are concerned about their own infrastructures and are making an effort to increase their cybersecurity measures to protect their assets. Specifically, 87 percent of companies note risks when it comes to maintaining or implementing operational infrastructure, up from 79 percent in 2014.
Emphasis on expansion raises international operations concerns. As competition continues to shape the industry, businesses are increasingly looking abroad to increase their profit margins. However, global expansion brings on many new challenges—96 percent of companies cite threats to international operations and sales, up from 89 percent in 2014. Specifically, 58 percent note concern over compliance with Foreign Corrupt Practices Act (FCPA), anti-corruption laws and anti-bribery laws, and 90 percent cite risks related to foreign supplier and vendor as well as global distribution. Meanwhile, companies are also highlighting expansion concerns outside of their control, with 86 percent citing risks related to natural disasters, war and terrorist attacks.
"For many years, the U.S. was the primary, if not sole, prosecutor with regards to anti-corruption. However, the number of countries implementing  and enforcing their own anti-corruption laws has substantially increased, requiring multinational companies to tackle compliance on a global scale,” said Nina Gross, managing director at BDO Consulting and a leader within the firm's Global Forensics Practice. “While anti-corruption is an industry-agnostic issue, the technology sector faces scrutiny from government regulators, such as the DOJ and SEC, shareholders and gatekeepers to ensure that they detect and remediate instances of FCPA violations. As such, designing robust anti-corruption internal controls and compliance programs should be a priority business focus."
New rules and increased deal flow drive accounting risks. With the new revenue recognition standard announced last May, many companies are unsure of how to navigate and implement the new rules. As regulatory standards change and governing boards increase their oversight, 92 percent of companies mention accounting, internal controls and compliance risks, which is a significant increase from 79 percent last year. Even the recent BDO Technology Outlook Survey found that more than half of tech CFOs (57 percent) have not yet fully familiarized themselves with the new standard and the associated implementation issues.
In addition, with more and more companies entering into M&A transactions, goodwill impairment concerns are growing. Specifically, 67 percent of companies cite this risk in their filings, up from 57 percent in 2014.  
About the Technology & Life Sciences Practice at BDO USA, LLP
BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 151 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.