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Tech M&A so far holding up as equity markets break down

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Tech M&A so far holding up as equity markets break down

Technology M&A for the year to date is on pace to beat records set in 2021, though macroeconomic headwinds remain a concern for all sectors.

As of July 28, there have been 3,131 tech deals for the year to date, versus 4,339 deals in the whole of 2021, according to data from 451 Research. Valuations remain elevated but are pulling back from last year's highs, with tech acquirers paying 3.1x their targets' trailing-12-month revenue on average. That compares to 4.3x trailing-12-month revenue on average in 2021.

Looking ahead, M&A forecasters believe tech deals will continue, spurred by broad-based demand for technology solutions to accommodate an increasingly digitized world. However, the pace of dealmaking could slow if the U.S. enters a deeper or longer recession than is currently forecast.

"M&A will continue to be core to [digital] transformation," but there are likely to be periods where achieving those objectives becomes more difficult, said Robert Copps, partner and head of U.S. M&A practice at law firm Eversheds Sutherland.

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Mergers and acquiescence

Digital transformation strategies that accelerated during the pandemic continue to support M&A activity, Copps said. Companies are adding connectivity features to their workplaces as employees work from home. They are augmenting their production and supply chains with smart technologies. These kinds of technological advancements require increased spending on cybersecurity and data storage solutions.

The dynamics are driving spending on technology products and demand for increased in-house technology capabilities, both of which support technology M&A valuations, Copps said.

In an April survey by Eversheds Sutherland, business leaders cited M&A as a "fast-track solution" to achieve strategic goals. Talent acquisition, technological advancement and supply chain resilience were the top three drivers of future M&A activity, Copps said.

Demand for tech deals is coming from across industries. For example, industrial conglomerate Siemens AG is focusing more on technology as it looks to support automation and digitalization efforts. Siemens has undertaken 115 M&A deals in the technology, media and telecommunications industry, more than any other industry, according to data from S&P Global Market Intelligence.

"So many industrial clients are not only hungry for digital transformation, but many refer to themselves as technology companies," Copps said.

Down but not out

Falling equity valuations that slow deal activity in other sectors may have the opposite effect in tech, said CFRA Research analyst John Freeman. If valuations remain low or go lower, both strategic buyers and private equity firms could go on a buying spree, the analyst said.

"It could be a weird game where M&A market valuations are higher than equity markets," Freeman said.

The fundamental drivers that led to a tech M&A boom in 2021 are still present, so those who can afford to buy right now have no less incentive to do so, said Michael Crook, chief investment officer at Mill Creek Capital Advisers.

"If you're sitting on cash and you believe your catalysts are still there … but prices are down, I would think that would be pretty motivating," Crook said in an interview. "With interest rates moving up and capital becoming a bit more scarce, we'd expect to see volumes decline a bit ... but demand has held up surprisingly well."

Strategic acquirers have reduced their M&A activity across industries, but private equity remains highly active, Crook said.

However, Crook noted that if a meaningful, prolonged recession takes hold, he expects much steeper drops in both M&A activity and valuations.

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Valuation volatility

Of course, stock market volatility can make it difficult for buyers and sellers to agree on appropriate valuations.

The tech-heavy Nasdaq index has lost over 22% since April 1, and no deals over $10 billion have been announced since May.

The decline in equity values removes a valuable source of M&A capital from strategic acquirers. The amount of deals funded with stock has plummeted in 2022, with no transactions over $1 billion covered with equity financing through the beginning of May, according to a May 4 report by 451 analyst Brenon Daly.

Microsoft Corp., Apple Inc. and Alphabet Inc. are all among the top 10 acquirers over the past five years, and those companies have seen their stock values drop 17.8%, 11.4% and 21.2%, respectively, for the year to date as of July 28. None of those three are among the top 10 most active acquirers in 2022, according to 451 data.

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451 Research is an offering of S&P Global Market Intelligence.