Tech M&A in 2024 and beyond

April 2024 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2024 Issue

In 2023, factors including economic and geopolitical uncertainty contributed to the most subdued period of M&A activity since the global financial crisis of 2008. According to PwC, total global deal value halved in just two years, dropping to $2.5 trillion from a peak of more than $5 trillion in 2021. Deal volumes also declined, down 17 percent from just over 65,000 in 2021 to around 55,000 in 2023. While mid-market deals continued, megadeals fell by 60 percent, from a high of almost 150 in 2021 to fewer than 60 last year.

In the tech sector, the pace of deals also slowed significantly though the year. A key trend was the participation of private equity firms, which showed a keen interest in acquiring tech companies. The largest tech deal of 2023 was Cisco’s $28bn offer for Splunk, announced in September.

Activity did pick up in Q4, setting the stage for a stronger 2024. The tech sector is expected to experience a surge of activity as companies look to add artificial intelligence (AI) and other innovations to their processes and product portfolios.

According to Bain & Co, M&A has never been a more important strategy for technology companies. AI reached an inflection point in 2023, but other areas of disruptive technology, such as cyber security and the metaverse, are creating an imperative for companies to innovate, which often ushers them toward M&A.

“Buyers and sellers of technology companies are still seeking common ground on valuations, which was a major obstacle to dealmaking in 2023.”

To that end, according to 451 Research’s Tech M&A Outlook Survey, 81 percent of dealmakers anticipate activity across the tech M&A market to accelerate through 2024. They are also significantly less concerned about two prevailing metrics in the global economy: growth forecasts and inflation.

Only 40 percent of respondents believe that either inflation or the uncertain growth outlook would weigh on their deals in 2024, down from those in 2023 who thought inflation (53 percent) and a slowing tech sector (nearly 63 percent) would hurt M&A activity.

GenAI

The sector’s latest defining trend is generative AI (GenAI). The technology has shot to prominence as companies explore new ways to transform how they do business, drive growth and increase profitability. Valued at $40bn in 2022, Bloomberg Intelligence predicts that the global market could grow to $1.3 trillion by 2032.

Since ChatGPT launched in November 2022, high-growth GenAI startups have been involved in a spate of venture capital and M&A transactions. Dealmakers are seeking out competing startups that look set to shake up the industry. According to Dykema, 71 percent of M&A dealmakers expect to acquire companies offering AI capabilities or that successfully implement AI solutions in the next year. Automation and AI are among the top three trends spurring M&A activity across sectors, including financial services, healthcare and manufacturing, according to Dykema.

Last year, Microsoft and Nvidia announced a $1.3bn fundraising for 12-month-old startup Inflection AI in June. French AI startup Mistral was just four weeks old when it raised $113m in seed funding – Europe’s largest-ever seed round. US-based software unicorn Databricks announced its purchase of OpenAI competitor MosaicML for $1.3bn. And Thomson Reuters agreed to acquire Casetext, a legal AI company providing automated workflows and tools for legal teams, for $650m.

The focus on GenAI is likely to continue throughout 2024 and beyond. According to 451 Research, 47 percent of respondents said GenAI would lead to a “significant” increase in M&A activity this year, compared with just one in 20 respondents who said that about other trends in the tech space, including observability, cloud native, DevOps and FinTech. These other trends were at least 10 times more likely to receive a forecast of a “slight” increase, rather than a “significant” increase in dealmaking in 2024.

Information and data security will also drive transactions this year. Data security is often cited among the top concerns hindering further adoption of GenAI. As efforts to address this problem continue, this area is set to receive significant investment in the months ahead.

Though hurdles remain and macroeconomic uncertainty and regulatory challenges are likely to weigh heavily on overall deal activity, 2024 appears to be a more promising year for M&A. Buyers and sellers of technology companies are still seeking common ground on valuations, which was a major obstacle to dealmaking in 2023. But the overall M&A market is regaining its strength. Driven by interest in AI-focused businesses, tech sector dealmaking could rebound in 2024.

Richard Summerfield