Tech CFOs Predict a Return to More Moderate Growth – BDO Survey

February 2016

Sally Slater
Bliss Integrated Communication
(212) 584-5475
sally@blissintegrated.com

CHICAGO – February 10, 2016 – 2015 might have been the year of the unicorn ― with an unprecedented 147 companies exceeding the $1 billion threshold ― but 2016 is shaping up to be the year the tech sector takes a breather.
 
According to BDO USA, LLP's 2016 Technology Outlook Survey, which polls 100 technology CFOs, less than half (48 percent) expect technology business valuations to increase in 2016, down from 62 percent last year. Also pointing to a more measured year ahead, less than half (46 percent) of tech CFOs expect to see an uptick in IPO activity this year, down from 52 percent of respondents last year. This aligns with the results of the 2016 BDO IPO Outlook survey of capital markets executives at investment banks, who reported a flat forecast for IPOs for the first time in seven years.
 
When looking at factors impacting IPO activity in the U.S. market, tech CFOs cite U.S. market volatility as the greatest influence (26 percent), closely followed by global political and economic issues (25 percent). The performance of recent technology IPOs and concerns about inflated valuations (both 20 percent) were also cited as significant factors.
 
But not all signs are so lukewarm. On a more optimistic note, nearly three-quarters (74 percent) of tech CFOs anticipate higher total revenues in 2016, projecting, on average, an increase of 8.8 percent over last year. Just two percent of respondents expect their revenues to decrease.
 
Appetite for M&A also remains strong, on the heels of a record year for tech deal-making. Technology deal value reached $713.1 billion in 2015, making it the second-most active sector after healthcare, according to data from Dealogic. Eager to capitalize on that momentum, 40 percent of surveyed CFOs have plans to pursue deals in 2016. Outside of their own plans, the pace of M&A is expected to continue in 2016: nearly all (96 percent) of tech CFOs anticipate M&A activity will stay the same or increase this year, and 72 percent predict acquisitions will be primarily offensive. Thirty-one percent of tech CFOs believe increased revenue and profitability will be the primary impetus for M&A activity in 2016, followed by improved market share (29 percent) and gaining technology assets and intellectual property (25 percent).  
 
"Investor sentiment toward the technology industry has soured in recent months as a number of IPOs have failed to perform and technology stocks took a hit," said Aftab Jamil, partner and leader of the Technology and Life Sciences Practice at BDO USA, LLP. "However, the chilly IPO environment and share price declines don't necessarily tell the full story. Finance chiefs are bullish about their company revenues as well as their M&A prospects. Disruption in consumer tech along with data analytics, cyber, cloud computing and the burgeoning Internet of Things market will create opportunities for further growth in 2016."
 
Additional findings from the 2016 BDO Technology Outlook Survey include:
 
Software to dominate deals again. In last year's survey, tech CFOs predicted that software would drive the bulk of M&A activity. The sector didn't disappoint, with total transaction volume increasing by 9 percent over 2014 and total value increasing by a whopping 72 percent to $213.2 billion, according to data from Berkery Noyes. In line with last year's outlook, 59 percent of tech CFOs believe software, including cloud computing, will generate the most deal activity in 2016. Just twelve percent of CFOs say the social media sector will trigger the most deal activity this year (down from 22 percent), closely followed by biotechnology (11 percent) and hardware (10 percent).
 
Fewer companies seek financing. Seventeen percent of surveyed CFOs say they anticipate seeking additional capital this year — a significant decrease from last year's number of respondents (38 percent). Of those planning to access capital, turning to a strategic partner is the most popular choice, at 36 percent of respondents. Twenty-three percent of CFOs plan to seek additional capital through private equity, up from 16 percent in 2015, while 21 percent will rely on the private debt market, up from just three percent last year. In what may be a response to signals of slowing IPO activity and significant market volatility, CFOs have shied away from the public markets, with only 10 percent seeking capital from either public debt or public equity.
 
"As the IPO market has cooled off, technology companies are looking to the private sector to increase their cash and liquidity in today's uncertain environment," says Lee Duran, partner and leader of BDO's Private Equity practice. "We’re seeing some companies using more debt financing when available in lieu of private equity capital.  However, while lofty valuations and a murky forecast for the sector have PE firms carefully scrutinizing investments, the lower middle market continues to see robust M&A activity."

VC-backed IPOs to cool off. Forty-seven percent of surveyed CFOs expect private equity-backed companies will give rise to the most tech IPOs this year, followed by venture capital (42 percent). Only 11 percent expect owner/manager or privately held businesses to drive the most IPO activity, down from 25 percent last year. In the last quarter of the year, venture capital firms invested $17 billion in U.S.-based companies, an 11 percent decline from the previous quarter and a seven percent decrease year-over-year, according to data from Dow Jones, pointing to a pullback in spending.
 
These findings are from the ninth annual 2016 BDO Technology Outlook Survey, a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 chief financial officers at leading technology companies throughout the United States. The survey was conducted from December 2015 to January 2016. Additional findings from the study will be released in the coming weeks.
 
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.
 
About BDO
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 63 offices and more than 450 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 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. For more information please visit: www.bdo.com.