Strategic buyers drove a solid recovery in tech M&A in the first quarter, while financial buyers largely stayed on the sidelines.
Total deal value in the first three months of 2024 was the highest since the second quarter of 2022, according to S&P Global Market Intelligence 451 Research. Spending by strategic buyers, which exceeded $107 billion, approached levels not seen since the post-pandemic boom in tech M&A, when interest rates were still low and a push toward digitalization was driving dealmaking.
The uptick in activity among strategic buyers contrasts sharply with the absence of big deals from financial buyers like private equity firms. Even so, investment bankers told S&P Global Market Intelligence that they expected overall tech M&A to be higher in 2024 than 2023 due to a strong pipeline of deals in the making.
"In pure activity levels, we are having a very solid first half and expect to be even busier in the second half," said Japhet Wuensch, head of European Technology and Services at Raymond James, in an interview.
Strategics lead the charge
Various factors are driving strategic buyers back to the deal table, including improving equity values, AI ambitions and the regulatory environment.
Capital One Financial Corp., for instance, leveraged its strong stock price performance to fund its pending $35 billion all-stock purchase of Discover Financial Services. Capital One shares were up 23% in the 12 months leading up to the Feb. 19 deal announcement. The same is true of Synopsys Inc. and its $32 billion cash and stock bid for ANSYS Inc. Synopsis shares were up more than 45% in the 12 months leading up to the Jan. 16 deal announcement.
The market for hardware to support artificial intelligence is a factor in Hewlett Packard Enterprise Co.'s pending all-cash acquisition of Juniper Networks Inc. The combined entity's network capabilities would allow it to better compete with Cisco Systems Inc. and Arista Networks Inc., especially in the area of AI networking chips. A few deals in the semiconductor space have a similar rationale.
There are also signs that Big Tech is seeking to test antitrust regulators, as free cash flows at large companies have been reaching record levels. Reuters reported that Alphabet Inc. is considering a $30 billion bid for CRM services provider HubSpot Inc., for example.
Still, Big Tech companies face unprecedented scrutiny from regulators in Europe and the US, and even small deals might get bogged down in antitrust uncertainty. Amazon.com Inc., Alphabet, Apple Inc., Meta Platforms Inc. and Microsoft Corp. collectively averaged about 30 deals per year before 2022. The group logged only five deals in 2023, and one so far in 2024, according to 451 Research data.
Antitrust lawyers say it has become hard to predict which Big Tech deals will be approved.
Buyout shops still dormant
Predictions of the return of private equity firms to the market did not pan out in the first quarter. Buyout shops are still sitting on high amounts of dry powder and face pressure from their limited partners to return capital. High interest rates remain an obstacle for private equity, given the leverage typically involved in deals.
"It's harder for PEs to be aggressive on price," said Brandon Eck, head of Mufson Howe Hunter's technology M&A.
Greg Bedrosian, CEO of tech-focused investment bank Drake Star Partners, said buyout shops are waiting for higher-quality targets. "PEs keep asking me: 'When are you going to bring the good stuff to market,'" Bedrosian said.
The money deployed by PEs as a percentage of all M&A has rarely been lower, 451 Research data shows. PE deal count as a proportion of all deals has gradually declined from 38% in the first quarter of 2021 to just about 26% in the first three months of 2024.
Hank Galligan, a principal at tech-focused advisory arm of BDO, said private equity firms are more focused on exits, but the IPO market remains weak, despite a few successful listings. Investment bankers expect PEs will be more active in the second half of the year, as more targets come online, especially those that waited for the environment to improve.
"The volume of deals we have in process is approaching 2021 levels, and I expect announced deals to substantially accelerate as we enter Q2," Jason Greenberg, co-head of global TMT investment banking at Jefferies, told S&P Global Market Intelligence.
High valuations for quality
In terms of the deals that are getting done, 451 Research data shows M&A valuations increased in the first quarter, largely driven by a few semiconductor-related deals. Japanese semiconductors company Renesas Electronics Corp. agreed to acquire Australia-based Altium Ltd. for $5.9 billion, or a revenue multiple of 21.8x, according to 451 Research. Cadence Design Systems Inc., which makes software for AI chip design, is acquiring Beta Cae Systems International Ag for $1.24 billion, or a revenue multiple of 13.8x.
With prices stabilizing, more companies are starting sales processes. "There will be more activity in the second part of the year, partly because more companies will come to market," said Drake Star Partners' Bedrosian.
However, not every potential seller will be able to secure better pricing. For companies valued at under $1 billion, valuations have stayed strong only for companies with high free cash flow levels and customer growth, investment bankers say. Companies with low growth rates are seeing lower valuations than during 2021-2022 and might have trouble selling in this market.
"Elevated interest rates continue to limit M&A interest in low-to-moderate growth companies," Greenberg said.
451 Research is a technology research group within S&P Global Market Intelligence.