State of tech M&A
Technology M&A rotated between historically low and high quarters of activity during 2020. Deal activity all but stopped at the beginning of the year as tech executives navigated the pandemic. Companies pivoted quickly, however, and tech M&A exploded in the second half of the year. To position themselves for future revenue growth, tech companies are adjusting their M&A strategy to focus more on a target’s business resilience, digital technology alignment, and to gain market share through consolidation.
Despite uncertainty and increased regulatory scrutiny, tech companies pursued more transformative deals in the past year. Megadeals that were US$5 billion and above made up 59% of all global technology sector deal value in 2020, up from 47% of deal value in 2019. As organic growth decelerates for many tech companies in the future, M&A activity will be an increasingly important lever for growth. Sixteen percent of tech companies surveyed said they plan to pursue transformative deals that are valued at US$5 billion or more in the near term. This will be increasingly important going forward as multiple expansion, or an increase in the price-earnings ratio due to sentiment rather than fundamentals, may slow down. Highly acquisitive companies tend to outperform and generate significantly higher shareholder return.
While the tech deal market is expected to remain healthy, 78% of tech executives surveyed in EY’s CCB report indicate that they expect to see increasing competition in the bidding process for assets in the next 12 months, primarily from private capital. Non-tech companies are acquiring capabilities in software, IT services and internet commerce verticals to digitalize offerings, while private equity players are placing big bets on securing applications and IoT devices as well as risk and compliance.
No discussion of the tech M&A market would be complete without mentioning the unprecedented growth in special purpose acquisition company (SPAC) activity. SPACs became a popular vehicle for companies seeking to go public following the most turbulent pandemic months as they provided greater pricing certainty. This took off quickly in the following quarters to reach a high in the first months of 2021, when SPACs represented nearly 50% of all tech M&A by value1.With a historic number of SPACs chasing companies looking to go public, valuations have increased considerably, also driving valuations in the more traditional M&A market.