Technology deals insights: 2021 midyear outlook

Insights into 2021 technology deals

Deal value for the first five months of 2021 was $145.8 billion, with $70.4 billion and $75.4 billion in the first and second quarter, respectively. Deal volume was high during the first quarter of the new year (518), but the pace declined significantly through the first two months of the second quarter (159) compared to prior years. The high value and low volume in the second quarter represented the second largest average transaction value per deal (behind the fourth quarter of 2020) over the last five years. This was primarily driven by four megadeals totaling $63.8 billion in the second quarter of 2021. Through May 2021, there were nine megadeals, with a total of $99.7 billion.

Tech is a highly competitive market with fast-changing business models. Despite the devastation wrought by the global COVID-19 pandemic, the tech sector was largely unscathed, and, in many ways, it benefited from the crisis. Consumers increasingly embraced digital channels, which forced many companies to adopt a cloud-based offering, and that resulted in increased deal activity.

However, an increase in investor demand and capital availability across the venture capital (VC) landscape — coupled with a strong initial public offering (IPO) market with a growing number of special purpose acquisition companies (SPACs) — is providing a variety of options for startups looking for liquidity leading to elevated valuations. This would likely encourage some buyers to wait for better pricing.

Technology deals outlook

With the COVID-19 vaccine being distributed across the nation and around the globe, companies are seeing the light at the end of the pandemic tunnel, and many are looking to return employees to the office. The last 15 months have placed tech industry leaders and top private equity (PE) firms in a strong position to buy. Companies have renewed confidence in deploying their excess capital, and many will look to M&A as an attractive outlet to accelerate growth, develop scale and digitize their businesses while interest rates remain at historic lows.

As valuations remain exceedingly high in a seller’s market, the deals market for the remainder of 2021 will depend on how valuations continue to trend in the public and private markets. For example, an extended rally in the stock market could keep the lid on M&A activity. The tech sector will also continue to benefit from buyers in other industries who will view the tech sector as an attractive M&A target, as digitization of the economy continues and tech gives them an opportunity to drive growth, efficiency and innovation.

Capital will continue to flow easily in the tech sector, as indicated by the record-breaking raise of $62 billion in the first quarter of 2021 by US-based VC-backed companies. The first quarter funding is nearly half of the total funding for all of 2020, setting a strong pace for the rest of the year.

On the downside, new laws and greater regulatory scrutiny have the potential to reduce activity and hamper Big Tech from closing deals in 2021. We have already seen oversight from the US House of Representatives Judiciary Committee formally approving a report accusing Big Tech of buying or crushing smaller firms — the first such congressional review of the tech industry. More suggested legislation is coming — including larger budgets for agencies to enforce antitrust laws — which could impact M&A activity significantly.