Grow Big or Go Home: M&A Acceleration in the US Tech Industry

By Shelle Martin, Senior Sales Director

The explosive growth of the tech industry has created a wealth of opportunities for mergers and acquisitions. Continuing the summer M&A Sector Spotlight series in partnership with Datasite, Mergermarket invited several technology expert panelists to talk about their forecasts for the months and years to come.

Moderator Rachel Stone, a reporter for Mergermarket, opened with a question for both audience members and panelists: “Will the technology sector dominate M&A activity in the second half of the year?”

Viewers and experts alike answered with a resounding “Yes”, with 96% of the audience voting Agree or Strongly Agree.

“We’re about as bullish as we’ve been on a business in a number of years,” said J. Stuart Francis, Senior Managing Director for technology investments at Evercore. Between relatively low interest rates and nearly all-time highs for equity values, he said, “The ability to get deals done...is as robust as we’ve ever seen it.”

COVID-19 continues to reshape the market

Elizabeth de Saint-Aignan, Managing Director for Sun Capital Partners, added that the most recent tech boom has been fueled in part by the COVID-19 pandemic, with a mass shift toward remote interaction driving demand for digital tools of all kinds.

Jennifer Simon, Datasite’s VP of Product Management, confirmed that the company’s platform is hosting far more deals in TMT than any other sector, and the gap is only getting wider.

The panelists expressed optimism that the dealmaking process would retain a significant remote component moving forward, offering increased efficiency and reduced travel demands. However, Elizabeth did note that in-person meetings are returning faster than she’d expected.

For some companies, she suggested, the willingness to meet face-to-face could function as a test of a prospective buyer’s interest.

Capital is abundant, but time is at a premium

Stuart said his firm expects the recent spate of large buyouts in tech to continue, given the huge amount of leverage available. The main factor holding buyers back, he said, is that valuations are currently very high - too high for comfort in some cases.

Elizabeth added that the sheer volume of prospects presents its own obstacle. She said that while top-tier assets are seeing more interest than ever, targets below that level may struggle to find buyers willing to invest the time for an evaluation.

The panelists agreed that this glut of opportunities has made firms more aggressive in rejecting deals that don’t fit their ideal criteria.

“It used to be that teams had time to assess every deal that came in,” Elizabeth said, “but now volume is just out of control.”

The audience was split on the question of whether these huge M&A volumes would lead to burnout among dealmakers. Jennifer confirmed that she’s noticing some fatigue among Datasite’s clients.

“I was on a call yesterday,” she said, “and this banker’s mantra was ‘I just want to get a few minutes back each week.’”

In pursuit of that goal, she noted, many firms are hunting for efficiency innovations, including tech solutions to automate low-value or repetitive tasks.

Regulation and antitrust

Rachel asked the panelists if they were concerned about Washington’s recent discussions regarding a move to break up big players in the tech sector.

Stuart opined that he thought it was unlikely that the government would be able to reach an agreement about such a drastic step any time soon. He supported restraint from legislators, saying, “[A]ny steps on that front should be quite cautious, because we’re in a global market, and you can’t just regulate in the US.”

He also noted that, despite concerns about anticompetitive behavior, giants like Amazon and Microsoft have provided the infrastructure for a huge wave of smaller startups.

Private investment and public offerings for tech startups

The next poll dealt with early-stage tech investment; nearly 80% of the audience agreed that early funding rounds would continue to grow. Rachel asked the panel what they thought was behind this ongoing increase.

Elizabeth highlighted the huge amount of capital in search of targets, resulting in ever-larger pitches for promising ideas. “A company that declines to take these dollars as they’re offered is putting itself at risk vis-a-vis the competition, who might take the money and therefore have more capital for development, or for sales and marketing, et cetera.”

Stuart agreed and added that early-stage companies are feeling an increasing need for significant resources to penetrate what’s become a multibillion-dollar market.

Rachel pivoted to discuss the recent spike in public offerings by tech firms that had remained private for a long time, such as Bumble, Coinbase and Robinhood. Stuart pointed out that the development of huge, late-stage private rounds enabled companies to stay private longer, but investors aren’t necessarily willing to wait forever for a public offering - and a long enough delay prompts questions from onlookers. Meanwhile, the growing acceptance of SPACs and direct listings has opened new avenues to the public market.

Final audience questions

The panelists agreed with an audience member's comment that the SPAC boom has driven up valuations and multiples. Elizabeth cited nearly $100 billion in capital under inherent pressure to locate assets quickly; Stuart added that the SPAC option provides an outlet for M&A in the $1 billion to $20 billion range, a tier previously crowded out by the abundance of mega-deals.

Another audience member asked if representations and warranties insurance is gaining industry acceptance. Elizabeth said that her firm uses it routinely and valued it for the added speed and simplicity. Stuart agreed that this tool is seeing ever-wider use.

“Usually when something gets that effective, it goes up in price,” he said, “so we’ll see what happens over time in terms of how carriers look at it.”

Looking forward

The overall forecast for M&A in the tech industry remains rosy, as massive growth incentivizes both buyers and sellers to pursue consolidation. Datasite and Mergermarket will continue to share expert perspectives as new opportunities emerge in the months ahead. To hear the full panel discussion, click here to watch the replay, and check out additional sector spotlight sessions here.