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Tech M&A Landscape: Navigating Uncertainty and Opportunities


Aug 8, 2023

Stakeholders in the tech ecosystem are finding ways to transact amid market uncertainty.

In the midst of a prolonged economic slowdown, the tech sector's M&A activity has been further challenged by recent setbacks. Major tech giants like Google, Amazon, Microsoft, and Zoom have implemented significant layoffs, citing factors such as higher interest rates, inflation, and a post-pandemic correction. Smaller companies and startups have also faced hurdles following the collapse of Silicon Valley Bank and reduced venture capital investments.

The middle-market tech sector is grappling with the turbulence of recent years. The early months of 2023 have seen a stark decline in deal activity, with only 11 middle-market tech deals in January compared to 48 the previous year, as reported by Refinitiv. While some experts see signs of a potential rebound, expectations remain tempered, and a return to the robust levels of 2021 and early 2022 appears unlikely. Challenges in dealmaking stem from increased interest rates and the higher cost of capital, impacting traditional leveraged buyouts.

Nevertheless, stakeholders in the tech ecosystem are finding ways to transact amid the uncertainty. Focus has shifted to thorough due diligence and identifying areas of growth within the sector. Strategic investors, armed with available cash and reduced reliance on debt financing, are better positioned to engage in deals in the current market landscape.

Strategic players are showing renewed interest in sale processes, leveraging their long-term perspective and financial resources. In contrast to the dominance of private equity platforms in recent years, corporate acquirers are reentering the M&A scene. Recognizing the potential for value amid uncertainty, they are seeking strategic opportunities, sometimes viewing depressed stock prices as a chance to secure growth.

Due diligence has taken on heightened significance in the face of increased risks. With rising cybersecurity threats, buyers are keen on assessing targets' cybersecurity readiness and program maturity. Scrutiny of organizational structures and employee dynamics has intensified, as the pandemic's impact on workplace cohesion becomes a focal point.

Buyers are rigorously evaluating sales pipelines to ensure business stability in an uncertain economic climate. Adjustments in valuation expectations reflect the recognition that macroeconomic conditions can deteriorate. Buyers are placing greater emphasis on last 12 months (LTM) and 2022 performance metrics, instead of relying on future projections.

While buyer-seller valuation gaps persist, they are slowly narrowing. Companies thriving within attractive subsectors are still achieving strong valuations, albeit within specific transaction contexts. Opportunities are emerging for high-performing businesses in sectors such as pharma services, digital transformation, and CFO software.

Despite a slow start to 2023, the second quarter has shown signs of a pick-up in dealmaking, driven by pent-up demand. Driving profitability in existing portfolio companies remains crucial for investors in the face of rising interest rates. Layoffs from larger tech firms are creating a talent pool for smaller entities, fostering growth prospects.

Although challenges in fundraising persist, the importance of sealing deals for investors remains pronounced. The tech industry's indispensable role in modern life and the global economy underscores its enduring significance, despite the ongoing market flux.

Source: Tech M&A Adjusts to a New Normal | Middle Market Growth

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