Investors invigorated by the digital transformation of cybersecurity and artificial intelligence (AI) technologies prepare for an M&A rebound in 2024
SAN FRANCISCO (November 2, 2023) – Morrison Foerster, a leading global law firm, today announced the results of its annual Tech M&A Survey, which reveals that dealmakers anticipate a potential rebound in M&A activity as they look to 2024. While global telecommunications, media, and technology (TMT) M&A transactions dropped by 63% in value terms and 32% by volume in H1 2023 compared to the same period in 2022, TMT deals continued to account for a very sizeable share of global M&A, representing almost a quarter of all M&A transactions globally and demonstrating the adoption of digital transformation and data analytics in every sector. The new Morrison Foerster survey report, “Directing Disruption: AI and Cybersecurity Underline Tech Sector’s Flair for Self-Renewal,” conducted in conjunction with Mergermarket, also reveals that challenging dealmaking and macroeconomic factors led to tech M&A strategies shifting to securing working capital and focusing on liquidity; adopting alternative deal structures or minority investments; and completing strategic middle market deals to increase competitiveness.
“This year’s Tech M&A survey reflects views influenced by a choppy global technology M&A market that has been impacted by the realities of challenging financial trends,” noted Brandon Parris, partner and co-chair of Morrison Foerster’s global M&A practice. “But as we look to 2024, despite macroeconomic uncertainties, there is much to be encouraged about, especially with the rise of generative AI and the renewed focus on cybersecurity innovation. We expect these and other technology areas to have a massive impact on global deal activity in the years to come.”
“Tech M&A deals will continue to be the go-to strategy for companies looking to scale and increase competitiveness,” added Spencer Klein, partner and co-chair of Morrison Foerster’s global M&A practice. “But to get deals done, both PE and corporate investors will continue to rely on smaller strategic deals and alternative deal structures as part of their M&A strategy while facing less predictable externalities like financing costs and antitrust concerns.”
Despite the downturn in tech M&A deal value and volume, all PE firms responding to the survey reported that they completed at least two tech M&A deals in the prior 12 months, including 68% that completed four or more transactions. Dealmaking in 2023 reflects a higher number of smaller domestic deals in all regions, as PE and corporate acquirers look to scale up to accelerate growth and innovation to remain competitive. Among corporates, only 14% completed four or more transactions, while 63% completed at least two over that period. In our previous survey, 60% of corporates reported undertaking two or more deals. This divergence in deal activity can be explained by structural, business, and funding differences between PE firms and corporates.
With digital transformation turbocharging generative AI, robotics, and data analytics this year, investors are incorporating these specific technologies into their M&A strategies to achieve market advantages and the highest returns, despite ongoing macroeconomic and geopolitical headwinds. Survey respondents continue to target younger tech companies with these capabilities. In this year’s survey, only 14% of respondents said they primarily target mature companies (those operating for five years or longer), essentially unchanged from 15% last year. Forty percent of respondents primarily target startups (companies operating for less than two years), and almost half of respondents (46%) say they primarily target companies that have been operating for two to five years.
ESG considerations in assessing M&A targets have only grown over the years. Across all markets, there has been a notable increase in the importance of ESG considerations when choosing tech M&A targets. This year there was a 15% increase in response to the question of ESG’s significance in picking the most recent target from 6.7 out of 10 in last year’s survey to 7.85 in the 2023 survey. The new ESG disclosure and compliance requirements are cropping up globally in parallel to the increased attention from tech M&A dealmakers. New climate disclosures from California and the European Union, both hotbeds of tech M&A activity, will keep ESG at the forefront of tech M&A dealmakers’ considerations for the foreseeable future.
The tech sector’s reach into all aspects of business and personal life has attracted regulatory scrutiny, especially as it relates to antitrust, consumer data protection, and privacy. The vast majority of respondents (81%) expect antitrust regulation of tech M&A to become either somewhat or significantly stricter over the next three years. Over a fifth of PE respondents (22%) are anticipating this increased scrutiny by identifying different industries or tech subsectors. Among corporates, tighter antitrust scrutiny would especially deter their organizations from seeking targets with a close connection to data privacy issues and/or the use of consumers’ personal data that they might have otherwise pursued (21%).
To download the full survey results with additional insights, visit: https://www.mofo.com/tech-ma-forecast.
In Q2 2023, Mergermarket surveyed 300 dealmakers from around the world to gain insights into the future of technology‑related M&A. Respondents were equally distributed among corporates with a minimum of $250 million in annual revenue and private equity firms with a minimum of $500 million in assets under management. With respect to geography, 30% of respondents were based in North America, 30% in Europe, 30% in the Asia-Pacific region, and 10% in Latin America. All responses are anonymous, and results are presented in the aggregate.
