Today’s Tech Exit Climate
As of mid-December 2023, there is a noticeable trend in the tech industry towards more strategic and carefully considered M&A as the preferred mode of company exits. Amidst this evolving situation, I-bankers are cautiously optimistic about the prospects that lie ahead in 2024.
Several indicators offer valuable insights into the current state of the M&A market, including:
Emphasis on Strategic Deals: Large tech companies with substantial cash reserves are increasingly turning to M&A as a means to fulfill precise strategic objectives. These objectives range from expanding into new markets and acquiring complementary technologies to fortifying their positions within their respective industries. Noteworthy examples include Atlassian, which executed 22 acquisitions in the U.S. enterprise tech and SaaS sectors, amounting to over $1.87 billion in the past year. Palo Alto Networks has similarly been active in this regard.
Limited Focus on Financial Deals: The prevailing high interest rates have led to a decrease in the emphasis on purely financial M&A transactions. It is anticipated that the M&A market will regain its vigor once the Federal Reserve initiates interest rate cuts, subsequently reigniting interest in financial deals, such as stock transactions.
Limited IPOs: The congested top of the IPO funnel caused by a large number of companies waiting to go public reflects a cautious approach by all parties, with many opting to stay private or explore alternative funding options due to equity market uncertainties and a furtive desire to avoid the scrutiny and arduous public company reporting requirements.
Deceleration in Deal Velocity: Although M&A deal volumes have subsided from the record highs witnessed in 2021, they continue to surpass pre-pandemic levels. This deceleration is attributed to a blend of factors, including escalating interest rates, geopolitical uncertainties, and inflationary pressures.
Ascendance of Mid-Market Transactions: While a few large-cap mega-deals have transpired, they have become less common. Conversely, there has been an upswing in mid-market M&A activities. This shift is attributed to the nimbleness and resilience often exhibited by mid-sized companies in the face of economic challenges.
Enhanced Regulatory Scrutiny: The Biden’s administration (mainly anti-trust) and European Commission (privacy and data concerns in addition to anti-trust) regulatory oversight of M&A has intensified, particularly within sectors like technology and healthcare. This heightened scrutiny has added complexity to the process of securing approval for substantial transactions.
Complex Structures in M&A: With elevated interest rates persisting, unconventional deal structures, such as carve-outs (aka “earn outs”), joint ventures, and spin-outs, have become more prevalent. I-bankers and law firms report a surge in deals characterized by creative and intricate structures aimed at facilitating transactions.
ESG Gains Ground: Environmental, social, and governance (ESG) factors are gaining in the mix of M&A decision-making. Investors and acquirers are placing greater emphasis on assessing the sustainability practices of target companies.
Additional trends to monitor:
Resurgence of Private Equity: Many private equity (PE) firms have remained on the side lines of the M&A arena since mid-2022. However, they currently hold a record amount of uninvested capital – aka "dry powder" – and are expected to re-enter the acquisition landscape in 2024.
Technology's Impact: The ongoing disruption caused by technology in traditional industries is anticipated to drive further M&A activity within the tech sector.
Growing Significance of Data: Data is rapidly becoming a valuable asset, prompting companies to pursue acquisitions as a means to gain access to this critical resource.
In sum, the M&A environment in December 2023 is characterized by complexity and caution. By the end of Q1’24 we are likely to see rate cuts, a stronger IPO and emergent M&A market. In 2024 and beyond, startups and emerging companies which demonstrate adaptability to the changes described above and the ability to strategically navigate this landscape will be more likely to enjoy a successful exits.