Tech execs focus on growth amid increasingly competitive M&A market

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.

Preparing for the future

The technology sector has traditionally been a leader in the environmental, social and governance (ESG) movement. With trust in the tech sector possibly eroding because of several factors including social trust, privacy, data use and increased regulatory attention, companies should continue to keep ESG initiatives top of mind. These include sustainable operations, energy management, product consumption and production, and especially transparency, ethics and data privacy. Customers and employees are looking to technology companies to take the lead on change, rather than just comply with regulation. Many tech executives surveyed agree that there is greater awareness by a broader set of stakeholders concerning environmental and social impacts of business and focusing purely on profit optimization may not suffice going forward.

Companies should take a “long view” of which pandemic-induced changes will stick, and make decisions focused on creating long-term value — human, financial, societal and consumer. Going forward, 77% of tech executives say it’s important that companies have a broader narrative to articulate to all stakeholders around long-term value creation. By being transparent about these initiatives and disclosing performance measures, companies can build trust and credibility within and outside their organization.