The increasing cost of capital combined with a growing aversion to risk is weighing heavily on technology M&A volumes in 2022.
This represents a sharp correction from 2021 when cheap debt and pandemic concerns stoked demand for technology solutions to support remote work, in-home digital entertainment and cybersecurity services.
"[It's] not just to the point where we're reverting back to where we were pre-pandemic, before the mania of last year, but it's looking and feeling like a brand-new environment," said 451 Research M&A analyst Melissa Incera during a recent podcast interview with S&P Global Market Intelligence.
A year ago, Incera and her team were tracking about 40 deals over $1 billion per quarter. During the third quarter, there were only 14 such deals.
While deal volume has slowed considerably, one-off deals are still drawing historic values in 2022. In mid-September, for example, Adobe Inc. announced a $20 billion bid for startup rival Figma Inc., with Adobe putting Figma's enterprise value at between 50x and 100x its trailing-12-month revenue.
But valuations across the board are largely retreating from last year's heights. Some large-cap public acquirers are exiting the M&A market altogether. Private equity firms, which are resting on a dragon's hoard of cash collected in 2020 and 2021, are having a harder time meeting their fundraising targets today.
"Private equity has been really interesting to track because their buying patterns aren't changing as dramatically as we're seeing from strategic buyers," Incera said. "The general consensus now is private market valuations are a lot more favorable than public, which has not typically been the case."
The third quarter may exemplify a new normal for the technology M&A landscape, defined by fewer deals, a hollowing out of middle-market transactions and the occasional megadeal, Incera said.
"This year, more than anything, has been characterized by the extreme duality of the market," the M&A analyst said.
451 Research is part of S&P Global Market Intelligence.