How a focus on revenue growth can help tech companies navigate recession

EY-Parthenon team tracked the results of more than 700 global publicly listed technology companies with a market cap above $1 billion from January 2017 through July 2022. The research indicates that companies that pursued mergers and acquisitions (M&A) during that period generated higher total shareholder returns (TSR). Despite market volatility due to the pandemic, high interest rates, inflation and geopolitical uncertainty, TSR for these high-growth tech companies was 2.1x low-growth tech companies during the past five years.

Within high growth companies, acquisitive companies report substantially higher returns than the remaining set 

An EY-Parthenon study of TSR during the 2008 Great Recession showed similar results.¹ Companies that raised capital and invested in M&A following the 2007–2009 period had a significant advantage over their competition.

From the Great Recession to the COVID-19 pandemic, the markets have historically rewarded companies that focused on revenue growth, particularly via acquisitions. The new study indicates that the trend continues, and many CEOs in the technology, media and telecom (TMT) sector appear to have taken note.

In the newly released EY CEO Outlook survey, 54% of TMT executives say they plan an acquisition within the next year. However, executives also say that given current economic conditions, they are taking a more cautious approach when determining which targets to acquire.² Their top deal drivers include investing in early-stage companies to enhance portfolios and strengthen talent pools and access to new markets in countries they currently do not serve.

In the new TSR study, the story and the results are different for tech companies that did not focus on revenue growth. They suffered over the long term with market returns 20% lower than those who did not.

Further analysis indicates that inorganic growth was better rewarded than organic. Serial acquirers generated 1.6x shareholder return than those that pursued organic growth.

Why recession could bring greater rewards for those who focus on revenue growth

Several factors indicate that the market tends to reward revenue growth via acquisitions in the long term, helping companies to lessen the impact from economic turbulence brought on by the 2008 Great Recession or the pandemic. Lower valuations due to market turbulence combined with record levels of cash on hand may present an unprecedented buying opportunity for technology companies seeking to revise operations and business models to compete effectively in the future.

Unprecedented levels of cash reserves combined with lower valuations may entice buyers to make transactions that they previously found too expensive. According to a report by Kellogg Insight³ in April 2022, US companies were sitting on $5.8 trillion in cash reserves due to nearly a decade of record profits and an economic boom that spanned several decades. The more than 700 technology companies studied in the most recent EY-Parthenon TSR study had cash reserves of $1 trillion.

At the same time, a recent EY analysis of Capital IQ data⁴ found tech companies also experienced a 30% decline in valuations since December 2021. Lower valuations may also benefit private equity buyers who want to acquire companies at lower valuations with hopes of later selling the company for a profit.

Integration strategy and execution is key to success – three focus areas

Regardless of economic environment, getting the integration of two entities right is the single most important factor to M&A success.

Focusing on the following three areas will help technology companies successfully integrate targets and accelerate revenue growth. These include:

• Agile integration planning and execution: create structured and dedicated teams that include a steering committee, platform teams, an integration management office (IMO), special issue teams and dedicated planning teams; leverage integration playbooks, benchmark and track integration timelines, and increase reporting frequency.
• Redefining operating model and organizational design: establish a go-forward operating model that answers key questions regarding the future of the combined entity, structure of new business units and product lines, adoption and sharing of tech tools such as integrated development environment (IDEs) and frameworks; align top management with the vision and mission of the combined entity to achieve faster decision-making and clear communication to employees, customers and suppliers.
• Capturing cost synergies: get savings by establishing common development platforms, IP reuse, increased bargaining power with vendors, and consolidated functions and systems; synchronise non-core functions, including strategy and corporate development, finance, human resources, IT and legal; right size sales, general and administrative teams for cost savings — this can be achieved by eliminating redundant roles, common sizing sales and marketing practices, training the sales force on bundled software and services, and aligning dedicated leads on product lines and end markets

As illustrated below, companies can also adopt faster scaling practices through product alignment and go-to-market strategy acceleration.