While M&A in the tech sector hit a multiyear low both in terms of total deal value and median valuation in 2023, the outlook for 2024 is a bit more optimistic.
Last year, total spending on tech M&A fell below the $300 billion mark, according to 451 Research. This marked the lowest level of spending in a decade.
The reasons for the downturn are myriad and well-discussed: slowing demand for digitalization, rapidly rising interest rates and a regulatory crackdown on Big Tech, among them. But investment bankers are hopeful that the worst is behind them heading into 2024, and they expect strategic and financial buyers to be more active, especially when it comes to smaller transactions.
"Some tech strategics are performing well, they've steadied the ship, margins are up, they are in a position and in need for growth. They are going to look for new targets," said Benjamin Howe, co-founder and CEO of tech-focused investment bank AGC Partners.
Big is out; small is in
Major strategic players such as Meta Platforms Inc., Salesforce Inc., Alphabet Inc., Apple Inc. and Amazon.com Inc. spent 2023 largely sitting on the M&A sidelines, having collectively made just four acquisitions in tech compared with 18 in 2022, Capital IQ Pro data shows.
In the face of pressure from their shareholders and boards, as well as regulatory scrutiny, large strategic buyers focused efforts on profitability this year rather than growth through acquisitions. Meta CEO Mark Zuckerberg famously declared 2023 "the year of efficiency," cutting 10,000 employees in mid-March after axing 11,000 positions at the end of 2022.
With operations now tighter and stocks trading higher, the appetite for M&A could grow stronger in 2024, especially for smaller tuck-ins.
Regulatory scrutiny is likely to translate into fewer mega deals, however. Adobe Inc. recently abandoned its $20 billion acquisition of Figma Inc. in the face of ongoing opposition from the UK's Competition and Markets Authority and the EU's European Commission. While Microsoft Corp. was able to close its $68.7 billion Activision Blizzard buy, it took nearly two years to complete the deal amid an intense fight with the regulators.
The harsh regulatory environment will continue to have a chilling effect on large tech M&A, but strategic buyers are likely to focus on smaller tuck-ins that do not tempt regulators to intervene.
"Dampened M&A activity in mega deals is likely to continue, but we are cautiously optimistic about the middle market," said Brandon Eck, managing director at M&A investment bank Mufson Howe Hunter.
Drowning in cash
As for financial buyers like private equity firms, many still have high levels of dry powder, and pressure from limited partners to deploy capital could grow in intensity. The private equity firms' available capital surged to a record high in December 2023 at $1.03 trillion, according to data from S&P Global Market Intelligence.
"With money committed, financial sponsors cannot sit on the sidelines indefinitely," said Jason Greenberg, the head of Global Technology M&A at Jefferies.
At the same time, investors in private equity firms are pushing them to realize some returns. Benjamin Howe, co-founder and CEO of tech-focused investment bank AGC Partners, said in an interview that limited partners will accept lower returns than on paper if the difference between the realized investments and committed funds increases.
Thoma Bravo LP, for instance, sold portfolio companies worth $16 billion in 2023, a record, while deploying just $4.3 billion for acquisitions, according to 451 Research. This kind of pressure could prompt financial sponsors to be more active both on the sell and buy side.
The price is right ... or wrong
One major question that will need to be settled in 2024 is whether sellers are willing to accept the prices potential buyers are asking. That was a major obstacle to dealmaking in 2023.
"Transactions have been falling apart on bid and ask spreads," Greenberg said.
Of the deals that were done in 2023, they were done at lower valuations. In particular, deals in the 10x and 20x revenue range were few and far between compared to previous years, including before the COVID-19 pandemic.
"We found that sellers are putting M&A processes on hold until valuations come back to a certain level," Eck said.
Bright spots
On the high end, the number of tech transactions valued at more than 10x revenue declined to a six-year low of just 11, 451 data shows. Those that attracted the highest valuations generally fell into the cybersecurity and AI categories. In particular, information security companies Ermetic Ltd., Perimeter 81 Ltd. and Magnet Forensics Inc., as well as AI infrastructure providers OpsRamp Inc. and Paperspace Co. all secured double-digit valuations.
This trend is unlikely to subside in 2024.
"The emphasis that businesses have put on AI strategy will likely translate into increased M&A activity for AI-focused businesses," Eck said, noting that with artificial intelligence, it is quicker and more "economically efficient" to buy than build.
451 Research is part of S&P Global Market Intelligence.