Seizing opportunities in Technology M&A: embracing change in uncertain times

In the dynamic landscape of technology, bold companies understand that crises present unique opportunities for growth and transformation. While macroeconomic uncertainty has caused some hesitation in the M&A realm, forward-thinking tech companies continue to make strategic deals to emerge stronger from the downturn. By acting swiftly and decisively, these companies can take advantage of reduced valuations, particularly for high-growth firms. Furthermore, the current market conditions favor tech companies, as competition from private equity investors has diminished. However, it's important to note that this window of opportunity may not last indefinitely. Historical trends show that ambiguity, rather than recessions, is the primary factor that slows down tech M&A markets. As such, companies need to proactively capitalize on this favorable environment by prioritizing speed, diligence, and synergy acceleration.

Navigating Market Conditions

In 2022, many tech companies chose to pause their M&A activities due to negative headlines featuring recession fears, rising interest rates, and record-high valuations. Consequently, deal values dropped by 45%, and deal volumes decreased by approximately 4% during the year, excluding gaming companies. However, large tech companies with substantial cash reserves and a willingness to act swiftly were able to identify strategic opportunities even during this challenging period. For instance, Broadcom 's $61 billion acquisition plan for VMware aimed to enhance its software capabilities and was announced in the first half of the year when M&A activity remained relatively healthy across industries. Notably, even as macroeconomic uncertainty persisted, resilient companies with a focus on valuable assets continued to make bold moves to position themselves for long-term success.

Increasing Affordability of Assets

A closer look at the evolving landscape reveals that tech assets are becoming more affordable month by month. Valuations for public tech companies have experienced a notable decline, particularly affecting high-growth companies, which witnessed an average 70% drop in valuations from November 2021 to December 2022. This shift creates a favorable buyer's market for tech companies, as they possess ample cash while encountering an abundance of attractive growth assets. Additionally, competition from private equity firms, which had gained momentum over the past decade, has decreased, with their representation in deal value dropping to 38% in 2022 compared to 43% during 2021. Furthermore, the IPO market has stalled, special purpose acquisition companies have faded, and growth equity has slowed, all of which limit a target company's ability to raise funds and favor strategic acquisitions.

Overcoming Hesitation

Despite these advantageous conditions, some companies remain hesitant to engage in M&A during times that appear conducive to purchasing. Often, these companies adopt a wait-and-see approach, hoping for further declines in prices. However, historical evidence demonstrates that it is ambiguity, rather than recessions, that hinders tech M&A markets. Lessons learned from past recessions, such as the ones in 2001 and 2008, as well as the initial uncertainty of the pandemic, reveal that ambiguity is temporary. During this period, there exists a temporary buyer-seller disequilibrium, where buyers anticipate a deal, but sellers are not yet willing to lower their prices. Executives are typically focused on sustaining their companies rather than pursuing deals. However, astute executives recognize that waiting until the worst has passed can lead to missed golden opportunities. Even during a recession, when uncertainty subsides, activity is likely to surge, potentially leaving hesitant companies at a disadvantage. Adobe 's acquisition of Omniture during the 2009 recession is a prime example, as it positioned the company as a leader in customer experience management and fueled its cloud growth.

Key Strategies for Success

To navigate the uncertainty and gain the necessary conviction to participate in M&A, companies should embrace the following strategies:

Act with Speed

Tech players that have successfully executed deals during periods of macroeconomic uncertainty and recessions have acted swiftly while others remained on the sidelines. Recognizing that uncertainty and recessions create temporary buying opportunities, proactive buyers understand the importance of moving quickly to secure favorable deals before others capitalize on them.

Stay Vigilant

Continuously refine and update your strategic plan, identifying the specific types of targets you seek to acquire. By maintaining a proactive approach and monitoring the market closely, you can easily seize opportunities as they arise. Those without a well-defined plan should start building one now.

Streamline Due Diligence

Conduct thorough due diligence promptly, leveraging external data sources and ensuring integration considerations are prioritized. Develop a granular understanding of the target's value, considering various levers for value creation, such as cost optimization, revenue enhancement, talent retention, capability upskilling, competitive positioning, and environmental, social, and corporate governance efforts. Pay attention to revenue synergies and critical talent retention, which are often underestimated. In the tech industry, despite layoffs, securing skilled professionals, especially in engineering roles, remains a challenge.

Accelerate Synergy Generation

Higher interest rates emphasize the importance of realizing synergies early. Buyers should establish a clear integration thesis and identify quick wins and accountable owners during the deal process. Integration efforts should commence before closing, enabling the realization of both cost and revenue synergies within a short timeframe, possibly even within six months. Detailed synergy planning should be an integral part of the due diligence process.

Benefits Beyond the Downturn

Embracing these adjustments to the M&A approach not only positions companies to capitalize on the current downturn but also delivers long-term benefits across business cycles. By honing their M&A capabilities, companies enhance their capacity for growth and transformation, ensuring their continued success even after the downturn ends.

While macroeconomic uncertainty has caused some companies to pause their M&A activities, bold tech companies recognize the hidden opportunities within crises. By acting swiftly and decisively, companies can take advantage of reduced valuations and decreased competition from private equity investors. However, this favorable environment may be temporary, as ambiguity, not recessions, is the primary factor that slows down tech M&A markets. Therefore, it is crucial for companies to adopt a proactive approach, emphasizing speed, diligence, and synergy generation. By doing so, tech companies can position themselves for growth and emerge stronger from the current downturn, while also establishing a foundation for success in the long term.