The 2023 Tech M&A Outlook
Narrator: It’s been a quiet year in the US IPO market. Rising interest rates and high-profile public losses led to the longest drought in tech IPOs this century. So where is everyone? Many of the unicorns that headed towards public markets in 2021 have pulled up short and turned to private investors instead. But with valuations at historic lows and financial headwinds likely to persist, how much private dealmaking should we expect in 2023?
Leif King: When the dotcom bubble burst, we saw M&A volume drop by about 50 per cent from the peak in 2000 to the trough in 2002. And similarly, we saw a fall-off of about a quarter to a third in M&A activity from the peak in 2007 to the trough in 2009-2010. But today is very, very different. The tech sector is much more mature and it’s much stronger than it was during either of those two prior dislocations. In the global financial crisis, nobody knew where the bottom was. Today, the zeitgeist in Silicon Valley is, this recession is going to be short, shallow, temporary.
Narrator: Much of this optimism is driven by the tech sector’s resilience. Despite the conditions, worldwide IT spending is expected to increase 3 per cent in 2022, and 5 per cent in 2023. No wonder investors are keen to grab a slice of the action while valuations are low. But expensive debt is likely to put a dampener on the buying bonanza.
Ted Smith: Because those firms on the private equity side that use debt as a component of the cash that they ultimately pay to the existing owners of business now find that form of capital more expensive today than it was 6 to 12 months ago. It hasn’t stopped that activity completely, but it does cause them to reevaluate what the cost of that capital is going to be and therefore what they can pay for a given asset.
Leif King: In the current market environment, buyers want to demonstrate to their shareholders that they’re disciplined in the M&A activity that they’re doing. And that means discipline on price, picking the right targets and managing the risk. And we see our clients being focused on risk along a number of different axes. That includes antitrust risk, ESG risk, employment and other legal risks. And so what we’re seeing in the current environment is that buyers are leaning in to the opportunity, looking for attractive candidates at the right price and reducing risk in the execution of those acquisitions.
Narrator: This isn’t an issue for anyone who can finance deals in cash, but it will change the type of deals private investors are used to making.
Leif King: We may see a drop-off in the megadeals within tech, but if we look at the bread-and-butter deals that are being done across the tech sector, we fully expect to see this activity continue or even increase in 2023, as compared to 2022.
Ted Smith: As we look forward to 2023, the big headline is we’re trading a desire for growth, for a desire for some profitability. We don’t want companies to stop growing, but what we want them to do is not grow so aggressively that they’re going to consume massive amounts of capital.
Leif King: So what does this mean for M&A activity? Well, we expect that the scarcity of financing and the scarcity of alternative exits for venture-backed companies is going to drive an increase in desire to transact through an M&A exit for venture.
Until financial headwinds blow themselves out, we can expect cash-rich buyers to be picky. If investors can find innovative ways to support tech firms through the economic downturn, they are likely to reap the rewards on the way back up.