We found that not only are a significant number of Texas companies looking for strategic M&A partnerships in 2020, but also that Texas is highly conducive to M&A activity. Low taxes and simplified regulations in Texas — coupled with a potential economic downturn and a growing focus on technology — are creating an extremely favorable M&A environment in the state. Here’s what we found.
2020 is going to be a year of momentum for Texas M&A activity, with 7 in 10 companies looking to make acquisitions.
The vast majority of Texas business leaders (81%) say M&A activity is a part of their company’s near-term (1-3 year) plan, and most of those with near-term M&A plans (71%) say it will happen before the end of 2020. In terms of the type of M&A activity to expect, most companies (61%) said they’re looking to make acquisitions rather than be acquired.
Deeper dive: There are several factors that help explain why 2020 will be an active — and acquisition-focused — M&A year in Texas. The first is the state’s prosperous economy, which is benefiting from a rapidly emerging tech scene, in Dallas as well as other major cities like Austin. Another factor is Texas’ regulatory climate. As one surveyed business leader told West Monroe, “Texas is overall a business-friendly state. Regulations are reasonable compared to other areas, and government agencies are willing to work with businesses during M&A activities.” Texas benefits from extremely positive sentiment among its business population: All 200 business leaders we surveyed said Texas presents a favorable climate for M&A.
A recession could help rather than hinder M&A plans.
While M&A activity occurs during both strong and weak economic periods, a potential downturn could provide unique opportunity for Texas M&A leaders. Of the companies planning to make an acquisition, 63% say the prospect of an economic recession is only increasing their efforts to acquire, with 77% of those doubling down saying that a potential recession is significantly driving their efforts.
Deeper dive: For many respondents, an economic downturn or market correction presents untapped opportunities. As one respondent told us, a downturn offers the chance “to be aggressive at acquiring more companies and people to help our overall bottom line.” Others see industry-specific opportunities, such as the respondent who expects tech and crypto business to increase during a recession — making now the time to acquire within those industries.
Technology is presenting a bigger challenge— and opportunity — for M&A activity.
Among those planning M&A activity in the near-term, a majority (62%) cited technology issues — for example, issues with infrastructure, cybersecurity, data breaches, etc. — as the biggest due diligence red flag, even ahead of financial concerns (53%). But technology is also a reason to carry out M&A activity, especially for smaller companies. Of the smallest companies we surveyed — those with 100-249 employees — the largest percentage (58%) said they’re pursuing M&A activity to gain access to new technology.
Deeper dive: As technology strategy becomes synonymous with business strategy, the understanding of technology risks and value becomes immensely important in the M&A process, making or breaking a deal. It’s time for large companies and even private equity firms to elevate their technology game, requiring separate and robust technology diligence as well as in-depth analysis to identify value creation opportunities. We see many buyers surprised, after the fact, regarding tech investments that need to be made and they’re cleaning up messes while needing to innovate at the same time. Our advice: Keep a stronger eye on technology. IT is often the second- or third-largest spend, and it is what enables every business today. With the amount of M&A activity expected in Texas in the coming years, it’s important to work with people who know both technology and Texas.
The Big Takeaway
If the outlook on M&A activity nationally in 2020 isn’t as optimistic as last year, Texas presents a much more promising picture. As West Monroe found, Texas is poised to be a notable region for M&A activity over the next few years — and the prospect of a downturn will further galvanize those efforts. But despite the rosy picture, Texas companies planning M&A activity still need to act strategically, particularly when it comes to technology. Right now, technology concerns present the biggest due diligence red flag. And that’s where business leaders are turning to third party resources: The overwhelming majority of those planning near-term M&A activity (88%) said they’ll be using a third-party advisor, with IT strategy development identified as the top area for third-party expertise.