At a Glance
- Despite the macroeconomic uncertainty that has curtailed M&A, bold technology companies are still minting game-changing deals to emerge stronger out of the downturn.
- Those that boldly move with speed can take advantage while valuations are down—most dramatically, for high-growth companies.
- The time for tech companies is especially ripe now as competition from private equity investors has dropped.
- This period of golden opportunity will not last forever. History tells us that ambiguity, not recessions, slows down tech M&A markets and that once uncertainty tapers, activity—and likely valuations—should return.
- To successfully take advantage of this opportunity, companies need to move with urgency, be proactive, turbocharge their diligence, and focus on accelerating synergies.
This article is part of Bain's 2023 M&A Report.
As they experienced negative headlines marked by recession fears, rising interest rates, and record-high valuations, many tech companies opted to put their M&A activity on hold in 2022. Deal value was down 45%, and deal volumes dropped by about 4% for the first 10 months of the year compared with the same period in 2021 (excluding gaming companies).
Large companies with ample cash that were willing to do the work and move quickly found opportunities for placing strategic big bets in 2022. Think of Broadcom’s announced plan to acquire VMware for $61 billion to boost its software capability. That announcement occurred during the first half of the year while M&A across industries still remained fairly healthy. Yet there still were big deals later in the year, when higher interest rates cooled activity. Adobe’s $20 billion bid for web-first collaborative design platform Figma (currently stalled by a US Department of Justice investigation) was announced in September. Undeterred by macroeconomic uncertainty, bold companies that eye strong assets are still willing to quickly make big moves to position themselves to emerge stronger when the fog lifts.
Month by month, assets are becoming more affordable.
Our long-term analysis of M&A activity across industries has demonstrated that fortune favors the bold. Companies that we refer to as “mountain climbers”—that is, those that engage in repeated and material M&A—outperform their less-active counterparts regardless of the economic cycle. In the tech industry, mountain climbers achieve an average 15.7% annual total shareholder return compared with an average of 12.7% for all companies studied.
Let’s look at what’s swiftly unfolding. Month by month, assets are becoming more affordable, with tech valuations for public assets sinking across the board. High-growth companies have been hit the hardest, with an average 70% decline in valuations from November 2021 to October 2022 (see Figure 1). This makes it more of a buyer's market for tech companies; they have more cash at a time when there’s an abundance of attractive growth assets from which to choose. Meanwhile, competition from private equity (PE), which had gained momentum steadily over the past decade, has dropped, with PE firms representing only 38% of deal value during the first nine months of 2022, down from 43% during the same period of 2021. At the same time, the IPO market has frozen, special purpose acquisition companies have all but disappeared, and growth equity has slowed—all of which limits a target’s ability to raise money and favors strategic acquisitions.
Valuations remain down vs. late 2021, and high-growth companies have been hit hardest, with as much as a 70% decline in 2022
Why do so many companies still sit on the sidelines whenever times seem right for buying? Some wait for prices to further decline. They view the stark decline in activity as an indication that valuations haven’t bottomed out yet and that there is still time to wait. History tells us, however, that ultimately it is ambiguity, not recessions, that slows down tech M&A markets. We learned from the 2001 and 2008 recessions and from the uncertainty of the early days of the pandemic that ambiguity is short-lived. There is a period of buyer-seller disequilibrium on what an asset is worth, with buyers expecting a deal but sellers not yet willing to lower prices. And during this time, executive attention typically is more focused on keeping the company afloat than on making deals.
But as executives become aware of the deals before them, some recognize that you can’t wait until the worst has passed. Once uncertainty tapers, even if we are still in a recession, activity is likely to pick up and you will have missed a golden opportunity. For example, it was during the 2009 recession that Adobe acquired Omniture in a deal that raised some skepticism but ultimately enabled the company to become a leader in the customer experience management space and spearheaded its overall cloud growth.
It all comes down to speed
So amid the uncertainty, how does one get the conviction required to leave the sidelines?
Be quick. Tech players that forged winning deals during past periods of macroeconomic uncertainty and recessions moved quickly while the supply/demand imbalance remained and as other buyers waited. Uncertainty and recessions present temporary dips for temporary buying opportunities, and sophisticated buyers know that if they don’t move quickly, somebody else will.
Tech players that forged winning deals during past periods of macroeconomic uncertainty and recessions moved quickly.
Be on the lookout. Know exactly what type of target you want to purchase by keeping your strategy fresh and updating priority sector scans. Then when opportunities arise, it will be easy to jump into the fray. Those without a proactive plan should be building one now.
Turbocharge diligence. Execute due diligence with speed, thoroughness, and an eye toward integration, supported by outside data sources. Have conviction in value at a granular level—thinking about the full set of levers for value creation across cost; revenue; talent; capability upskilling; competitive position; and environmental, social, and corporate governance efforts. Diligence should thoughtfully incorporate factors such as revenue synergies and key talent retention, which may have historically been underplayed. Despite layoffs in tech, the talent market remains tight for critical roles in areas such as engineering. (For more about diligence in today’s M&A market, see the chapter “Tougher Times: Putting the Diligence Back in Due Diligence.”)
Generate synergies at speed. Higher interest rates increase the premium of realizing synergies early. Buyers need a crisp deal integration thesis with an eye toward quick wins and accountable owners. Integration should be a focus prior to closing so that both cost and revenue synergies can be realized sooner, even within six months. This starts with due diligence—work out in advance the synergies that you can achieve on day one.
All of these adjustments to the M&A approach will provide meaningful upside as companies position themselves to grow out of the downturn. Even more important, honing their M&A capabilities will pay dividends across business cycles, long after the downturn ends.