Diana Kenneally: There continues to be a tremendous expansion of our reliance on technology in the current environment. We have become more dependent on virtual meeting platforms for business, distance learning for students and related emerging technologies in support of activities that would otherwise take place in real time in person. I am fortunate to have the opportunity to speak with Doug Mangum, head of the Technology Banking Group at Texas Capital Bank, to discuss trends in the Tech sector and how they impact the M&A space. Doug, What trends do you see emerging in the current environment?
Doug Mangum: Clearly, there is now a greater focus on technologies that support virtual activities as in-person interactions are limited for the time being. As with other seminal events like 9/11, activities returned to normal but some aspect of our lives were changed forever—for example, how we navigate through an airport. The question in the tech sector is going to be about how much of the virtual activities we now engage in will remain in practice once social distancing is no longer required.
Diana: In the near term how do you see this rise in activity and demand for technology impacting M&A market?
Doug: There is going to be a growing trend that is already underway where large players are buying relevant technologies in the “virtual segment” rather than taking the R&D route. That has several implications from the corporate finance perspective, including for companies that are developing the technologies ostensibly with the view of cashing out to a larger strategic buyer. The VC investment market can be a concern, as can the challenges of providing buyside credit in a time when buyers are being very cautious about compromising their cash positions in what can be construed as an uncertain time. However, even during these times the market remains effective in providing the needed capital. I have not seen a change in the cost of capital, and the same providers have remained steady in messaging an “open-for-business” attitude. There is increased due diligence and a greater focus on evaluating a company’s customer base and other factors that could be impacted by the current COVID-19 environment.
Diana: So how are lenders working to address these risk concerns?
Doug: Execution and risk management is clearly getting higher visibility. Closing deals in the virtual realm has added risk. Whether real or perceived, negotiating in an environment where you can’t sit across the table from you counterparty is a challenge that we are only now growing accustomed to facing. Lack of physical access to operation and shaking a person’s hand can have a profound effect on the comfort level; not enough to walk away, but enough to take extra precautions. We have gained additional comfort in many technology companies, as they are already accustomed to working remotely and with enhanced cybersecurity protection.
Diana: So there are clearly some added challenges. How are clients dealing with this?
Doug: Let’s be clear: Risks are inherent to every deal all the time, so there are well established protocols to managing execution and counterparty risks of all types. Experienced and highly competent advisors can go a long way to ensure a transaction is executed smoothly, and in an environment where many of the counterparty risks are mitigated. Your role as Escrow Agent is an example of one of those functions, where confidence and integrity to ensure escrowed funds are managed in accordance with mutual expectation are critical.
Diana: What do you think the future holds for lending in the tech sector M&A market?
Doug: The M&A space in technology will continue to ramp up as transactors continue to become accustomed with the new way of doing deals in the virtual environment. Because it’s the tech sector, the comfort level with virtual etiquettes and means of commerce will ramp up faster than in other sectors, not only with lenders but with all relevant parties. I know the appetite for lending in to the tech sector will remain strong. The backbone and supply chain needs for so many traditional businesses rely on mission critical technology, and those businesses will need to rely even more on technology-driven efficiencies.
Diana: The majority of your career has been spent in Austin, Texas; how does the market in Austin compare to the Boston tech market? Are there similarities?
Doug: Once you are outside Silicon Valley, you have entrepreneurs like in the Boston and Austin markets who are strongly committed to creating value in their companies that will not only attract regional VC and PE firms, but also investment interest from across the country. Both of these markets remain strong and vibrant in the creation, investment, and M&A needs for technology companies.
Diana: Thanks for your time today, Doug. Your perspective on the tech market is greatly appreciated.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Texas Capital Bank, N.A.