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Tech M&A dealmakers remain bullish, says MoFo survey

Morrison & Foerster, a global law firm, has released the results of its annual Tech M&A Market Survey, which show that dealmakers foresee 2022 sustaining a high level of M&A deal volume on top of record-setting activity in 2021. 

The second quarter of 2021 was especially active, with USD511 billion in aggregate deal value, far outstripping pre-pandemic highs. The new Morrison & Foerster survey report, Fast Forward: How Technology M&A Is Reshaping Industry, in conjunction with Mergermarket, also shows that the top drivers for tech M&A deals over the next 12 months will be scaling up for industry competitiveness, keeping pace with technological advances, and realigning strategies to address the lasting impact of the Covid-19 pandemic.

“This year’s appetite for transactions, higher tech valuations, and increasing acceptance of additional M&A financing structures translate into dealmaker optimism for tech M&A next year,” says Brandon Parris, Morrison & Foerster’s global M&A co-chair. “Companies continue to invest in their operations in order to compete in a constantly changing marketplace. The drive to grow and scale through new technologies will continue to fuel the tech M&A pipeline well into 2022, as companies seek market-leading positions in their industries.”

A total of 78 per cent and 54 per cent of respondents, respectively, expect aggregate tech M&A deal volumes and average values to increase through the first half of 2022.

Some 42 per cent of respondents abandoned or postponed a tech M&A deal between May 2020 and May 2021 due to the Covid-19 pandemic.

The key driver of respondents’ tech M&A strategy through May 2022 will be scaling up to increase competitiveness, with 22 per cent of survey respondents identifying this as the most important factor for their organisation.

Cloud technology is cited as the best near-term sector for dealmaking opportunities, as identified by a wide margin of respondents (19 per cent).

A total of 25 per cent of respondents believe the greatest challenge facing tech M&A through the first half of 2022 will be a stricter regulatory and foreign direct investment (FDI) environment.

The survey also shows that tech M&A values are expected to continue to rise over the next 12 months as a result of record investments made by venture capital, private equity, and other investors in 2021. Nearly three-quarters of North American respondents (73 per cent), for example, predict average tech deal values will increase, including nearly half (47 per cent) who expect a significant upsurge. Respondents in Asia and Europe also predominantly anticipate increased valuations, at 63 per cent and 57 per cent respectively. Latin America dealmakers were more cautious, with only half of respondents based in the region reporting that average deal values are expected to increase.

Over the last 12 months, private equity (PE)’s growing investment in tech has contributed to an increase in private company valuations. The survey also shows continued enthusiasm for the technology sector by PE respondents. While 45 per cent of corporates are anticipating doing two or three deals and 9 per cent expect to complete at least four tech M&A deals, PE respondents are more bullish on future tech investments, with nearly half (49 per cent) expecting to do two or three tech deals and almost a third (30 per cent) seeking to do four or more in the next year.

Across all respondents, high-growth tech companies operating for two to five years were the top M&A target. Nearly two-thirds of respondents (60 per cent) say they most frequently look to acquire tech companies with this profile, while 26 per cent preferred mature companies over five years old. Companies at this funding stage are looking to scale and grow, and the operational expertise of a venture capital (VC) or PE firm is especially beneficial at this juncture.

The market for high-growth tech companies is competitive as it is the preferred target for PE firms entering the traditional VC market. Nearly three-quarters (74 per cent) of PE respondents preferred high-growth companies compared to 46 per cent of corporate respondents. PE firms and corporates with shorter investment time horizons and more conservative risk-return strategies prefer tech companies with more road-tested business models, while VC firms have more experience and risk tolerance for startup investments.

When asked about the types of technology that offer the best opportunities for dealmaking over the next 12 months, respondents selected B2B technologies that supported new pandemic-driven preferences for convenience and safety. As a foundational technology that underpins the internet infrastructure and new lifestyles based on remote work, e-commerce, and at-home entertainment, cloud technology received the most responses, from 19 per cent of dealmakers; this illustrates the clear impact of the pandemic on deal-making. The next two leading subsectors, customer relationship management (16 per cent) and business intelligence and data analytics (14 per cent), underscore how firms are prioritizing large datasets to drive future tech M&A valuations.

Tech M&A deal volume reached record highs through the first half of 2021, assisted by a myriad of M&A deal structures from special purpose acquisition companies (SPACs) to joint ventures (JVs), to private investments in public equity (PIPEs), to club deals. Just under half (49 per cent) of all respondents are considering a SPAC for a tech M&A deal over the next 12 months, but private equity firms are enthusiastic adopters, with 57 per cent of PE respondents looking to close a SPAC transaction. The deal structures most likely to be utilised for upcoming tech M&A deals include JVs (25 per cent), club deals (21 per cent), and PIPEs (16 per cent).

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