General trends in tech M&A
Hello, (virtual) world once again! Despite everyone’s efforts in 2021, including the rollout of vaccines and varying rounds of lockdowns and work-from-home mandates, a true “return to normal” for M&A dealmakers was foiled anew by COVID-19 and its variants. Undeterred by the pandemic, high target valuations, intense competition for attractive assets and regulatory uncertainty, the deal world again proved that robust activity is possible with distributed workforces Zooming through the market faster than you can say, “You’re on mute.”
Tech M&A surged to a staggering $1.1 trillion during 2021 – an increase of 71% compared to 2020 – and accounted for 20% of the $5.9 trillion(!) in the year’s global M&A deal value. Software deals dominated the 2021 tech M&A landscape. Driven by the realities of a pandemic changed world, ecommerce flourished, demand for cloud-based solutions increased, and work-from-home necessitated more advanced protection from cybersecurity attacks.
Remarkably, the sheer volume of dealmaking tells only part of the story. Let’s dig into more detail from the arena.
Cybersecurity threats drive M&A strategy
A recent study found that 81% of global organizations saw an increase in cyberthreats following the onset of the COVID-19 pandemic. For companies that fell victim to cyberattacks, it has been reported that 67% of those attacks targeted remote workers and, for the vast majority of companies affected, at least one attack was attributable to systems put in place in response to COVID-19. Data breaches attributable to remote work have also proven more costly to remediate.
With ever-increasing pressure to protect data in remote work environments, acquirers urgently invested in cybersecurity solutions. As of Q3 2021, cybersecurity M&A deal value increased 61% year over year, with target valuations reaching new highs relative to prior-year cybersecurity metrics and other segments of the tech sector. As companies face increasing pressure from regulators to address cybersecurity challenges and simultaneously make remote work a more permanent feature (whether a full-time or hybrid model), we expect cybersecurity solutions to remain in focus for 2022 tech M&A.
R&W insurance shaping expectations in tech M&A
In a highly competitive (and, frankly, more seller-friendly) M&A market in 2021, acquirers were more receptive than ever to representation and warranty insurance. While R&W insurance has been a staple for private equity buyers for several years, the increased adoption of R&W insurance by strategic acquirers in acquisitions of private targets is a notable trend – almost 30% of all R&W policies in 2021 were procured by strategic buyers.
The recent uptick in R&W insurance used by strategic acquirers in competitive situations has begun to normalize its use in venture-backed M&A, with more venture investors demanding the cleaner exit afforded with a buyside R&W insurance policy. On the other side of the negotiating table, however, we still don’t take as a given that strategic acquirers blanketly utilize insurance products. Tech acquirers that offer large premiums to recent valuations continue to successfully negotiate for traditional escrows, and focus on robust coverage for intellectual property and data privacy matters (often potential exclusions under R&W policies). Nevertheless, the frequency with which strategic acquirers are adopting R&W insurance as a potential tool is noteworthy, and it will require dealmakers of all stripes to weigh the utility of such policies, particularly in competitive situations.
Antitrust agencies scrutinize tech transactions
Tech M&A managed a record-breaking year, despite a significant shift in global regulators’ views of the antitrust landscape and consumer sentiment about the market power of large tech companies. In February 2021, the Federal Trade Commission announced that it would stop granting early termination of the Hart-Scott-Rodino (HSR) Act waiting period, citing a “historically unprecedented volume of filings during a leadership transition amid a pandemic.” For comparison, before the suspension, early termination was granted in more than 75% of filed transactions that requested such treatment. In August, the FTC announced that it would begin sending “warning” letters notifying parties that expiration of the HSR waiting period without FTC comment does not prevent the FTC from later reviewing and unwinding a deal (a right the FTC has always had, but infrequently exercised). In January 2022, on the same day that Microsoft announced that it had agreed to acquire Activision Blizzard for nearly $69 billion, the FTC and the Department of Justice launched a joint public inquiry “soliciting public input on ways to modernize federal merger guidelines to better detect and prevent illegal, anticompetitive deals in today’s modern markets.”
In addition to these measures, the FTC and the DOJ pursued significant merger challenges. Most recently, the FTC challenged a vertical transaction – NVIDIA’s planned $40 billion acquisition of chip designer Arm.
The changes implemented by the FTC and the uncertain enforcement climate have caused parties to reevaluate risk allocation on antitrust matters, with a deepened focus on efforts and conduct of business covenants, reverse break fees and closing conditions. Expect acquirers and targets to continue to keep a close eye on antitrust developments in 2022 as they plan their next moves.
SPAC transactions persist despite choppy waters
For industry experts questioning whether the SPAC momentum that gained traction in 2020 could be sustained, 2021 provided a mixed response. The volume of SPAC IPOs in 2021 shattered previous records, but most came in the first quarter, with more SPAC IPOs in the first quarter of 2021 (298) than all of 2020 combined (248). SPAC IPO activity cooled off significantly in Q2 (64), but picked up slightly in Q3 (88) and more substantially in Q4 (163). The cooldown that started in Q2 was attributable to a confluence of factors, including performance challenges for companies that recently went public via SPAC, a choppy PIPE market, high redemption rates, public statements from Securities and Exchange Commission staff foreshadowing enhanced scrutiny of SPACs, and guidance from the SEC staff regarding accounting treatment for warrants issued by SPACs, which required hundreds of SPACs to restate their financials.
Given the surge in SPAC activity, it was inevitable that shareholder litigation would follow. In August 2021, litigation was filed in federal court claiming that SPACs are “investment companies” that should be registered under the Investment Advisers Act of 1940. In response, more than 50 major law firms (including Cooley) published a joint statement stating that there was no legal basis for the claim advanced by the plaintiffs, but it appears as though William Birdthistle, the SEC’s new Director of Investment Management, may disagree. Before the December announcement of his appointment, Birdthistle had publicly stated his personal view that the plaintiffs’ claims are persuasive.
Just after the ball dropped to ring in 2022, the Delaware Court of Chancery also arrived at the SPAC party. On January 3, in the MultiPlan Corp. Stockholders Litigation, plaintiffs (public investors in the SPAC) claimed that the SPAC’s fiduciaries breached their duty of loyalty by failing to disclose certain material information regarding the SPAC’s proposed business combination target. The court held that the entire fairness standard (rather than the more deferential business judgement rule) would apply to the court’s review of the defendants’ actions “due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction.” We expect the climate of scrutiny on deSPAC transactions to continue in the year ahead.
We remain watchful in the new year. Regardless of any pending regulatory changes or outcomes of shareholder litigation, there are more than 500 SPACs looking for acquisition targets, suggesting that deSPAC transactions will continue to feature prominently in the 2022 M&A arena. The Q1 2021 surge in SPAC IPOs means that a large number of SPACs will be entering the back half of their two-year window to complete a business combination in Q1 2022. Given the resulting sense of urgency and robust competition for targets, we also expect that an increasing number of SPACs will seek out non-US targets.
Greener pastures ahead?
Continuing 2020’s trend, environmental, social and corporate governance remained in the spotlight, as regulators, investors and activists increased the pressure on companies to prioritize ESG initiatives. In March 2021, the SEC announced the creation of a new Climate and ESG Task Force charged with identifying material gaps in climate and ESG-related disclosures and developing initiatives to “proactively identify ESG-related misconduct.” The SEC also foreshadowed plans to further implement rules for human capital management and board diversity disclosure. Expected disclosure metrics include workforce turnover, skills and development training, compensation, benefits, workforce demographics (including diversity), and health and safety. ESG was front and center for investors as well, with the number of environmental and social shareholder proposals receiving majority support in 2021’s proxy season nearly doubling compared to 2020.
With increasing focus on ESG matters, 2021 was an open window of opportunity for dealmaking in the ESG technology subindustry. In July, Blackstone announced its agreement to acquire Sphera, a provider of ESG software, data and consulting services, from Genstar Capital for $1.4 billion. We also noted the Q3 announcements of the acquisition of Goby, an ESG platform serving the commercial real estate and fund management industries, and Accuvio, an ESG data aggregation and reporting software company. As boards seek to manage expanding expectations from regulators and investors on ESG matters, expect ESG solutions to be an increasingly important, and sought-after, fixture in tech M&A.
Looking ahead to 2022
We expect the robust pace of dealmaking to continue in 2022, while dealmakers keep an eye on the evolving regulatory environment. With the FTC’s promise of greater scrutiny for Big Tech, we are monitoring whether private equity buyers facing fewer antitrust hurdles than their strategic counterparts will continue to increase their presence in the tech M&A market. We expect the tech M&A market to stay competitive in 2022, as strategics continue to accelerate growth through transformative M&A, private equity firms head into the year with ample dry powder and hundreds of SPACs seek possible business combination targets.
 Alliant Transaction Liability Insurance, 2021 Representations & Warranties Insurance Overview and Market Update
 Deal Point Data, accessed on December 31, 2021.