2023’s much-discussed downturn in mergers & acquisitions – with global M&A volume and value down 6% and 17%, respectively, from 2022 – was largely driven by the slowdown in the tech sector, with global tech M&A volumes down 51% year over year, while other sectors saw marked increases.[1] The headwinds in the tech M&A sector are generally reflective of two core trends:
- Higher interest rates – and parallel fear of further increases – led to plummeting and often volatile valuations across private and public markets for growth-oriented companies, with skyrocketing financing costs for would-be acquirers (creating a perfect storm for significant gaps in buyer/seller valuation expectations).
- Global regulators maintaining an aggressive posture toward tech deals, particularly for mega-cap tech companies, further moderating activity.
Despite these headwinds, tech deals still got done in 2023, particularly in mission-critical subsectors like artificial intelligence (Microsoft’s investment in OpenAI, Databricks’ acquisition of MosaicML), cloud and data analytics (Clearlake and Insight’s acquisition of Alteryx, IBM’s acquisition of Apptio) and cybersecurity (Cisco’s acquisition of Splunk, OpenText’s acquisition of Micro Focus). Carve out tech acquisitions also continued to be attractive to strategic and private equity buyers, with GTCR’s acquisition of a majority stake in Worldpay from FIS for up to $18.5 billion, IBM’s acquisition of two businesses from Software AG for 2.3 billion euros, and Rocket Software’s acquisition of OpenText’s application modernization and connectivity business for $2.3 billion leading the pack. However, unlike the go-go era of 2021, tech deals in 2023 tended to be bolt-on rather than transformative, took longer to get done, and required more creativity and bespoke structures. As a result, we saw an uptick in stock and earnout consideration, private company mergers of equals and carve out transactions throughout the year.
Looking ahead, the tech sector seems primed for an M&A rebound, as strategics prioritize gaining or expanding exposure to mission critical technology, inflation and rate hike expectations hold or subside, the syndicated debt market dethaws, boards and management teams reorient themselves around current valuations rather than 2021 highs, the tech IPO window (hopefully) reopens, and private equity sponsors reenter the sector in force.
With these key trends in mind, let’s take a closer look at the developments in tech M&A during 2023, and what we expect to see in 2024.
Private equity slowed but not stopped by financing environment
Despite record amounts of dry powder accumulating for sponsors, high financing costs, persistent valuation gaps and a closed tech IPO market led to a significant decrease in private equity M&A activity in 2023. Private equity activity accounted for only 27% of tech M&A in 2023, a six-year low (and a substantial decrease from the 2021 record of 36%). There were only 16 announced take-privates of US-listed tech targets by private equity sponsors in 2023, down from 21 in each of 2021 and 2022. Notable players in the tech M&A space – Thoma Bravo and Vista Equity Partners – took a material step back in dealmaking for the year, announcing one and two tech take-privates in 2023, respectively, down from six and three, respectively, in 2022. Despite some isolated bright spots – such as Thoma Bravo’s $10.7 billion sale of portfolio company Adenza to Nasdaq – PE-backed tech exits also took a hit in 2023, with total deal values declining 35% versus 2022.[2] The moribund IPO market was a major contributor to this decline: There have been no sponsor-backed tech IPOs in the US since 2021.
Continuing the trend we noted for 2022, sponsors increasingly used private credit sources in lieu of the syndicated debt markets to finance buyouts in 2023. However, by Q4 2023, banks largely had cleared acquisition debt taken on in 2021 (such as Citrix and Twitter) from their balance sheets and were assertively looking to reenter the acquisition finance fray. As a result, private debt providers and the syndicated market increasingly are competing on pricing and covenant packages to win new acquisition financing mandates, and many bulge bracket banks are sponsoring their own private debt funds. Still, average leverage levels in sponsor buyouts declined from 7.1x in 2022 to 5.9x in 2023, showing that competitive pressures in the financing markets could not provide relief from the rising interest rate environment. As a result, sponsors increasingly funded buyouts with more equity (coming in the form of bigger direct sponsor equity checks, club deals and/or target stockholder rollovers). Of the 16 US take-privates noted above, all but one were funded with over 50% equity at announcement, and almost half were 100% equity funded, a significant increase in the proportion of majority equity-funded deals from 2022 and 2021.[3]
Looking further ahead in 2024, private equity dealmakers will be under tremendous pressure from their limited partners to ramp up new acquisitions and exits – flat or declining interest rates, a recovering acquisition finance market, and converging buyer and seller valuation expectations may be just the spark needed to ignite sponsor dry powder this year.
Mega-cap tech firms take a step back – for now
Mega-cap tech companies largely sat on the sidelines in 2023, perhaps in part due to the tough regulatory environment. For example, the six biggest public tech companies (Apple, Microsoft, Alphabet, Amazon, NVIDIA and Meta) announced just nine collective acquisitions in the 2023, compared to 33 collective acquisitions in 2022.[4] Further, there were only six announced acquisitions of US-listed public tech targets with an equity value greater than $500 million by strategic acquirers in 2023, compared to 15 in 2022 (a 60% decline) and only three tech mega-deals (more than $10 billion) in 2023, compared to five in 2022 and six in 2021.[5]
The pull-back in mega cap tech and sponsor activity was sorely felt in the venture capital backed tech M&A market. Tech companies backed by venture capital and private equity saw their median exit prices falling to 30% below prior funding rounds in Q3 of 2023. This decline reflects the overall startup M&A market in 2023 – only 1,738 venture-backed startups were acquired globally, the lowest total since 2015.[6]
Will strategic tech buyers return to the fray in 2024? The year is already off to a hot start, with two mega-cap strategic tech deals – Hewlett Packard Enterprise’s agreement to acquire Juniper Networks for $14 billion and Synopsys’ agreement to acquire Ansys for $35 billion – announced in January.
Global regulators continue to be aggressive
Despite some high profile wins in 2023 (including Microsoft/Activision and Broadcom/VMware winning clearance for their mega-deals), tech dealmakers continue to face a challenging regulatory environment in the US and globally, creating a significant headwind for M&A. This is particularly true for mega-cap tech acquirers (no matter the deal size), large-cap M&A transactions between parties in the same or adjacent markets, and, increasingly, private equity sponsors pursuing roll up strategies.
Let’s take a look at some of the key regulatory trends impacting tech M&A in 2023.
FTC, DOJ continued litigate-to-deter strategy, despite mixed courtroom record; published new Merger Guidelines
Throughout President Joe Biden’s term, the Federal Trade Commission (FTC) and Department of Justice (DOJ) repeatedly have demonstrated their willingness to sue to block M&A transactions (including based on novel theories of harm), even if the likelihood of success in court is relatively low. In doing so, they hope to expand judicially recognized theories of competitive harm, cause parties to abandon transactions, and deter dealmakers from undertaking deals to begin with. The FTC and DOJ launched a record 50 merger enforcement actions in their fiscal year ended September 30, 2022 (the most recent period for which data is available). Success in litigation, however, has been mixed. For example, courts rejected the FTC’s challenge of Microsoft’s $68.7 billion acquisition of Activision Blizzard and Meta’s acquisition of virtual reality fitness developer Within Unlimited, with the latter challenge based on a theory of potential competition. In a win for the FTC, an appeals court affirmed its divestiture order based on a vertical theory of harm in Illumina’s acquisition of Grail and granted a preliminary injunction in the FTC’s challenge to IQVIA’s acquisition of Propel Media.
In December 2023, the FTC and DOJ released new Merger Guidelines, which, while not binding on courts, are sure to be influential and reflect many of the aggressive and novel theories of harm that the DOJ and FTC have pursued under the Biden administration, including entrenchment of a “dominant” position and serial acquisitions. The guidelines also lower the concentration thresholds and introduce a 30% combined share threshold to trigger a “structural presumption” that a merger is illegal.
Global antitrust regulators – particularly UK CMA and European Commission – aggressively asserted jurisdiction, challenged US tech titans
Global regulators have also taken aggressive approaches to tech deals. In particular, the European Commission (EC) and the UK Competition and Markets Authority (CMA) have proactively asserted jurisdiction over tech companies engaging in strategic transactions, even for targets with a relatively limited nexus in the EU and UK, with a particular focus on large-cap US tech buyers. For example, Amazon recently pulled the plug on its planned acquisition of iRobot following a lengthy EC review because the parties did not see a path to approval. Not to be outdone, the CMA has opened an initial review into Microsoft’s partnership with OpenAI, which is structured as a 49% minority investment without board or other control rights.[7] And there is evidence that the aggressive posture is working for regulators, who unlike in the US do not need to seek a court order to block a deal. In December, Adobe and Figma abandoned their $20 billion tie-up following pressure from the EC and CMA, resulting in Adobe’s payment of a $1 billion reverse termination fee to Figma. The EC and CMA also tend to coordinate closely with the FTC and DOJ on their investigations. For example, the CMA required concessions from Microsoft for the Activism deal – in particular, Microsoft agreed to transfer the cloud streaming licensing rights for all current and new Activision Blizzard games to Ubisoft Entertainment, a rival game publisher in France.
Rising geopolitical tensions, national security focus on tech led to more assertive CFIUS, proliferation of ex-US FDI regimes
In the US, the Committee on Foreign Investment in the United States (CFIUS) moved aggressively in 2023 to mitigate perceived national security issues arising from foreign acquisitions of and investments in US businesses. While China and Russia remain the primary focus of CFIUS scrutiny, in 2023, CFIUS blocked (or signaled that it would block) transactions involving Persian Gulf states that traditionally have cleared CFIUS without significant government interference. CFIUS also has increasingly turned to the use of highly burdensome national security agreements to manage perceived national security risks arising from cross-border transactions.[8] Finally, building on a trend that began in early 2020, CFIUS has continued to pursue post-closing inquiries of cross-border deals that closed without prior notification to CFIUS.
Outside the US, geopolitical tensions are manifesting themselves in proliferating global foreign direct investment (FDI) regimes, increasing the cost, burden and closing risk associated with regulatory review, particularly on larger transactions involving global businesses, which now regularly face antitrust and FDI filings in more than 10 jurisdictions.[9]
The risk of regulatory reviews is particularly acute in China, which recently adopted new FDI regulations. For example, in August 2023, Intel terminated its $5.4 billion acquisition of Tower Semiconductor, an Israeli chipmaker, and paid Tower a $353 million reverse termination fee, after failing to obtain approval from China’s State Administration of Market Regulation. This represents only the latest in a series of semiconductor transactions (including Qualcomm’s 2018 aborted acquisition of Dutch chipmaker NXP Semiconductors) to meet their demise in China.
With global regulators continuing to maintain assertive postures, we expect regulatory clearance strategy to remain top of mind for dealmakers, paired with a continued focus on contractual “efforts” standards, divesture/litigation/structural remedy obligations, “outside” dates, and reverse termination fees. Dealmakers also will keep a keen eye on how US and international election results impact regulatory regimes and enforcement policies in the years to come.
Shareholder activists take half step back from tech, while hostile acquirers step to the fore
In 2023, 24 new activist campaigns were launched at US-based tech companies, representing approximately 14% of all campaigns – a decrease from 2022 tech activism levels (34 total campaigns and 20% of activity).[10] A significant driver of this drop likely is the decline in PE sponsor take-private activity, as one of the most reliable sources of tech activism campaigns in recent years are campaigns to sell the company to private equity. Continuing a trend from the second half of 2022, 2023 saw activists in mega-cap tech companies focus on capital allocation and operational improvement campaigns, highlighted by the campaign launched by a number of activist investors at Salesforce in the first quarter of the year.
Another result of the persistent valuation mismatch between buyers and sellers is the uptick in hostile M&A activity in the tech space. In March, Blackbaud rejected an unsolicited offer from Clearlake Capital to acquire the remaining 81.7% of Blackbaud that it did not already own, while National Instruments, Getty Images and Hire Right also received public unsolicited proposals.[11]
For a deeper dive into key activism trends in 2023 and what they mean for 2024, see Cooley’s inaugural shareholder activism year-in-review blog post.
Banner year for AI and mission-critical sectors
Despite the down year, dealmakers prioritized cutting-edge subsectors such as AI, cybersecurity, data analytics and cloud. The aggregate value of global M&A transactions related to AI grew 23% to $75 billion in 2023 compared with a year earlier, although the actual number of such deals fell by about 7%.[12] Although the AI sector is still in its nascent stage, of the 46 startup companies that reached unicorn status in the US in 2023, 16 were in the AI space. In the public markets, tech company valuations saw a steep increase based on growth expectations with respect to AI capabilities. For example, NVIDIA, the largest supplier of GPUs necessary to run AI models, saw its valuation skyrocket as investors sought to invest not only in AI but also the “picks and shovels” represented by adjacent sectors. In addition to acquisitions of AI startups, big tech companies invested heavily in AI in 2023 – Alphabet, Amazon, Microsoft and NVIDIA alone invested more than $25 billion in private AI companies, up from $3 billion in 2022.
AI may be the talk of the tech town, but the cybersecurity, data analytics and cloud sub-sectors had relatively strong years as well, at least compared to overall tech M&A activity. M&A volume in the cybersecurity sector softened through 2023 with 363 transactions announced or completed, compared to 447 in the prior-year period. However, the mission-critical nature of cybersecurity products and services has bolstered average disclosed deal value in the middle market. Not to be outdone, Cisco’s $28 billion acquisition of Splunk, the largest tech transaction of the year, represents a wager on the increasing importance of Splunk’s hybrid cloud cybersecurity and data analytics offering.
Looking ahead in 2024
The economic uncertainties and fears of a recession that have deterred dealmakers in the past few years have begun to subside, which could spur tech M&A activity in 2024 as companies and their boards get used to the “new normal” of high interest rates and aggressive regulatory regimes, and confidence grows that policymakers achieved a soft landing for the economy. Many VC-backed tech companies that raised cash at record-setting valuations in 2021 and early 2022 are adjusting valuation expectations, while private equity sponsors face increased pressure to deploy capital and return cash to investors. In addition to interest rates leveling off, these trends are likely to help close many valuation gaps between buyers and sellers. If the IPO markets remain choppy, some VC-backed tech companies that have been waiting to go public may look to sell or “dual track” instead, further driving tech M&A activity. We expect the burgeoning AI sector to continue to be a bright spot in dealmaking, as companies race to keep pace with each other by adding AI capabilities to product offerings. Notably, however, looming elections around the world, including in the US and India, could temper a bit of our deal optimism, as companies pause deal activity to assess any political impact on markets and regulatory environments. Whatever happens, we’re here to keep you current on developments and strategy.
[1] Evercore 2023 Year in Review. For example, the energy and financial institutions group sectors saw deal values increase 74% and 83%, respectively, year over year.
[2] PitchBook 2023 Annual PE Breakdown – US
[3] For example, Silver Lake’s $12.5 billion take-private acquisition of Qualtrics, announced in March 2023, was largely funded by equity commitments by Silver Lake and its co-investors, including a $1.75 billion equity investment by Canada Pension Plan Investment Board, and with just $1 billion of debt; Vista Equity Partners’ $4 billion take-private acquisition of EngageSmart, announced in October 2023, was fully funded with equity financing; and Francisco Partners and TPG teamed up to acquire New Relic for $6.1 billion, which was funded through $2.65 billion in debt from a group of private credit lenders, a $250 million rollover by New Relic’s founder and the rest with equity commitments from the sponsors.
[4] Capital IQ
[5] Deal Point Data; Cooley analysis
[6] Crunchbase
[7] The EC has also continued to make use of so-called Article 22 referrals in tech deals, which allow it to review deals of substantive interest, even where the monetary thresholds conferring jurisdiction are not met. Through this route, it has opened reviews of Qualcomm’s proposed acquisition of Autotalks and the European Energy Exchange’s proposed acquisition of Nasdaq Power in the second half of the year.
[8] These agreements can include restrictions on governance rights, limitations on doing business in certain countries, restrictions on where and how target technology is developed, and requirements for government pre-approval of a target’s contracts.
[9] For example, all but four of the 27 EU member states have established FDI screening regimes, seven of which were introduced or made permanent in 2023.
[10] Deal Point Data; Cooley analysis. US-listed targets with market capitalization of at least $500 million at campaign initiation.
[11] Deal Point Data; Cooley analysis
[12] S&P Global Insight Report 2023
