Technology M&A

  1. What is the Pros and Cons for a Vertical Acquisition vs. Horizontal Acquisitions in a Tech M&A (This answer is identical to the HC answer because the same aspects apply)?

M&A activity is the main source for growth in the Technology Industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a tech company acquires another tech company and Vertical Acquisitions when a tech company acquires an manufacturing company or other company which provides a service to the tech company.[1] Horizontal and Vertical Acquisitions are not mutually exclusive.  Tech organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the tech space involve the acquisition of another tech organization which is in the same market, i.e. Tech company acquires it’s competing tech company, such as Facebook acquiring SnapChat and Instagram. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[2] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired tech organization which may decrease its value.

Vertical acquisitions in the tech space involve the acquisition of a tech company in a different market. As a larger tech enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the tech market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the major concern in the tech industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.

  • Prominent Regulation concerns for a Tech IPO/ICO

IPO Regulations

Initial Product Offerings (IPO), are regulated by the SEC. The Securities Act of 1933 requires companies to open their books to the public and registering the securities they wish to sell with the SEC. The Act has two main functions; to require that investors receive the financial information concerning the securities and to prohibit fraud in the sale of securities. [3]

The SEC was created by The Securities Exchange Act of 1934. The Exchange Act regulates the trading markets and requires compliance with ongoing SEC reporting obligations. 

Public companies are also regulated by the Sarbanes-Oxley Act of 2002. The Oxley Act seeks to prevent corporate fraud. It created the Public Company Accounting Oversight Board.

ICO Regulations

Although it’s a digital market, certain facts may determine that the ICO is a security and fall under the SEC jurisdictions.  To date, no ICO has been registered with the SEC as a security.[4] However, companies issuing ICO may be required to file a regulation D exception with the SEC.  The regulation D exception which will allow them to sell the ICO without the need to register as a security with the SEC.[5]  Companies who do not file a regulation D exception may be subject to fines and other punishments by the SEC.

The main regulatory concern for ICOs in the lack of regulations. By the nature of blockchains, ICOs are designed to be market regulated with minimal third-party oversight. However, the SEC does give some oversight on dealing with ICO to prevent fraud and promote healthy investment opportunities. [6]

  • How to evaluate a tech company in a Tech M&A

M&A valuations are used in determining the purchase price of a target company. There are two fundamental principles in M&A valuations. The Buyer wants to purchase at the lowest value and the Seller wants to receive the highest value.  The traditional method of valuation is to analyze past performance.  Start-up Tech companies are in a unique position in which they do not have a past performance to analyze. Yet tech M&A transactions are continuously placed at a high value. This is done by comparing the start-up with established tech companies which are similar in kind. [7]

In this market-based valuation method, investors look to the price of acquisitions in recent transactions of similar companies. Market Multiples allow investors to get an idea of what the market is paying for similar companies.[8] By analyzing similar companies, investors can forecast the future earnings of the startup. Also, investors can utilize these forecasts to make a backward projection to document potential growth. Another Method of valuation of start-up tech companies is the Discounted Cash Flow (DCF) method.  DCF estimates the value of a start-up tech company based on future cash flow. The present value of expected future cash flow is found by using a discounted rate. The startup is then valued at the present value estimate.[9]  An acquiring tech company will consider buying the startup tech company if the present value estimated is equal to or higher than the cost determined by the market multiples and there is potential future growth.


[1] https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp

[2] https://www.investopedia.com/ask/answers/051415/what-are-advantages-and-disadvantages-horizontal-integration.asp

[3] https://www.sec.gov/fast-answers/answersregis33htm.html

[4] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

[5] https://www.sec.gov/fast-answers/answers-regdhtm.html

[6] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

[7] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[8] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[9] https://www.investopedia.com/terms/d/dcf.asp

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