Strategics Sour on Tech M&A
The appetite for technology buys has declined sharply among corporate acquirers. Speakers at an ACG/S&P webinar on market trends said buyers are looking for more stability at tech companies and focusing on profit rather than growth.
Strategic acquirers, who have historically made up the bulk of buyers in tech acquisitions, were much less active in the sector last year, according to commentary and slides presented at an ACG Middle-Market Insights Webinar, which was hosted by ACG and sponsored by S&P Global Market Intelligence on December 12.
Unlike private equity sponsors, who are hamstrung by the rising cost of debt, strategics are cautious because of declining stock prices, said Brenon Daly, research director in tech M&A, at S&P Global Market Intelligence. Corporate buyers have traditionally financed their purchases with stock and cash. But at a time of declining equity prices, they don’t have as much to spend.
The tech sector has also seen a variety of headwinds in 2023, with many companies conducting mass layoffs, closing offices or cutting product lines. Today, investors are looking for more stability from tech companies before ramping up purchases again, Daly said. Buyers have also shifted their focus to profit rather than growth.
According to slides presented at the webinar citing S&P Global Market Intelligence data, tech M&A experienced a sharp decline in 2023, with a projected $280 billion in deal value (data compiled through December 6, 2023), down from $586 billion in 2022 and a record $792 billion in 2021.
“2023 is coming in as the sharpest decline that we have ever seen in the tech M&A market,” Daly said. “We’re basically bottoming out from where we were a decade ago. It’s about half of the spend of 2022 and the past five-years rolling average,” he added.
He noted that tech M&A experienced a spike in 2021, coming out of the COVID-19 pandemic, when all the changes in the workplace and people’s personal lives made everyone more reliant on technology.
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Strategic acquirors like Microsoft, Intel, Adobe and Amazon typically drive tech M&A in any given year, Daly said, and tend to account for three-fourths of M&A volume in the sector. The spike we saw in 2021 was a result of high growth rates at tech companies that inflated buyers’ confidence. “In 2021, if you could think of a deal, you could probably get it done,” Daly said.
Strategics contributed to $155 billion in tech M&A value for 2023, while financial sponsors accounted for $112 billion, according to another slide from the event. In 2021, those numbers were $563 billion and $229 billion, respectively.
Now, deals aren’t getting done for financial and strategic reasons. On the financial side, declining stock prices are the culprit, Daly said. “Virtually all of the multibillion-dollar tech deals use equity to pay for them. The bear market took that away,” he added.
In terms of strategy, uncertainty and bad news at tech companies have caused buyers to shift their focus. “Confidence and currency equals transactions. You can’t have uncertainty in a market or you won’t transact.” When buyers were making a lot of purchases of tech companies at high valuations, the focus was on accelerating growth, expansion and growing the top line. Now, the focus has shifted on the bottom line: profit. “2022 saw the highest number of layoffs since the dot-com collapse. And all of these things—layoffs, office closures, getting rid of product—are directly orthogonal to M&A,” said Daly. It’s counterintuitive to be doing deals in the midst of these changes and investors are looking for stability first. “Wall Street is demanding a focus on the bottom line,” Daly said.
2022 saw the highest number of layoffs since the dot-com collapse. And all of these things—layoffs, office closures, getting rid of product—are directly orthogonal to M&A.
S&P Global Market Intelligence
The Broader M&A Outlook
Speaking to M&A trends overall, Joe Mantone, news desk manager, U.S. Financial Institutions at S&P Global Market Intelligence, said investors are looking forward to a slightly more active year in 2024. “We’re wrapping up the second straight year of an M&A downturn. Looking forward to next year, there is a general market expectation that activity will pick up in 2024,” he said speaking in December. “That’s dependent on a more steady rate environment and absent any major macroeconomic shocks.”
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Though he cautioned that no one is expecting a sharp rise in activity because many of the headwinds that dampened M&A in 2023 are still present. “Even though rates are expected to be steady as opposed to rising, we’re still dealing with a higher rate environment, which increases the cost of financing and makes M&A more challenging,” he said.
Regulatory hurdles are also weighing on investors, as the Federal Trade Commission has proposed an expansion and revision of the HSR merger notification form. New regulatory pressures with respect to antitrust concerns and add-on acquisitions among PE firms could further dampen activity. “Antitrust concerns in the U.S. have been a focal point of the administration and that’s certainly not going away. It has been a deterrent to larger deals,” Mantone said.
Summarizing what’s ahead, Mantone said interest rates will be higher for longer, regulatory concerns are top of mind and private equity is at the ready with piles of dry powder. “Private equity is a wild card. There is a ton of dry powder that’s ready to deploy, but the higher cost of financing changes the math for [sponsors], so they’ve been reluctant to put money to work,” Mantone said.
Anastasia Donde is Middle Market Growth’s senior editor.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.