Tech companies fret over data privacy, but ready to bet on IPO market

Cybersecurity concerns, along with U.S. economic growth, are the two top drivers anticipated to spur overall U.S. tech industry growth in 2019.

Data privacy remains at the center of the sector’s worries, with 87 percent of tech CFOs expressing a high or moderate concern about the issue. It also ranked third in the list of companies’ biggest business priorities this year, after scaling the business (37 percent) and product or service innovation (34 percent), according to the 100 U.S. tech CFOs surveyed in BDO’s 2019 Technology Outlook Survey.

Tech companies’ emphasis on data privacy and cybersecurity comes as no surprise: Last year’s various data breaches were a sobering reminder of the stark reputational, financial and legal consequences that can follow the negligence of personal data. The implementation of the EU’s General Data Protection Regulation (GDPR) and the California Data Privacy Act further reinforced the gravity of the issue.

Despite these challenges, tech companies are optimistic about their business operations: 84 percent expect an increase in total revenue in 2019, at an average net change of 12.7 percent, and 62 percent anticipate an increase in their number of employees.

Recruiting and retaining talent (34 percent), adding new products or services (32 percent) and/or pursuing mergers and acquisitions (M&A) (17 percent) are considered by tech CFOs to be the strategies most critical to business growth in 2019 and 2020. To fund expansion, approximately 37 percent of businesses plan to seek additional capital in 2019.

“Tech companies can expect to face many challenges in the year ahead, from data breaches and cyberattacks to continued regulatory uncertainty concerning trade and other policies,” said Aftab Jamil, assurance partner and global leader of BDO’s Technology practice. “Regulatory bodies will continue to demand greater levels of accountability and transparency, and the race toward innovation will continue to speed up. As a result, tech companies will need to reevaluate and fortify their operational and financial management in order to respond swiftly and nimbly.”

A year of unicorns? IPO outlook

With multiple mega-unicorns initially set to debut in 2019, tech CFOs had been optimistic about the industry’s 2019 IPO outlook. However, many of these hopes dampened following the 35-day-long government shutdown, which delayed the IPO market and left many companies and investors in limbo.

Whether some of this year’s bigger deals will face a delay remains to be seen—but tech CFOs are balancing hopeful optimism with caution when looking at the year ahead.

• 37 percent expect U.S. tech IPO activity to increase this year, while 46 percent expect it to stay the same.
• 53 percent expect private companies to choose to pursue M&A over going public, while 25 percent expect them to stay independent.
• Companies’ revenue and profitability will be the top factor impacting IPOs in 2019 (cited by 44 percent), followed by market positioning (29 percent), corporate governance and compliance (10 percent), management credibility (9 percent), and financial reporting (7 percent).

Tax reform: A favorable impact?

While the new U.S. tax reform law has been in place for more than a year now, 2019 will be the year tech companies truly feel its impact.

• 68 percent harbor high or moderate concerns about tax changes overall—at the local, state, national and global levels—in 2019.
• Nevertheless, 75 percent expect U.S. tax reform’s impact on the industry to be favorable this year—with 9 percent expecting it to be “very favorable.”
• Tax compliance in multiple jurisdictions is a key worry for 22 percent.

“U.S. tax reform will continue to have ripple effects on tech companies—and across all industries—for years to come,” said David Yasukochi, Tax office managing partner and co-leader of BDO’s Technology practice. “As a result, tech companies will have to ensure that they’re not only up-to-speed with the latest tax policy changes, but that they are constantly redefining their tax strategy to manage future risks and opportunities that come with the tech industry’s continued impressive growth.”

Scaling through collaboration: M&A outlook

Riding on last year’s robust M&A activity, executives continue to have high expectations for 2019.

• 55 percent expect M&A activity to increase—and 16 percent to increase significantly.
• 43 percent anticipate an increase in M&A valuations, despite the fact that many have already reached sky-high amounts.
• 60 percent plan to pursue their own M&A in 2019, spurred by ripe market conditions.

These findings are from the 12th annual 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 U.S. The survey was conducted from November to December 2018.