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Technology deals insights: 2021 midyear outlook

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

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.

“The level of deals activity in the TMT sector has been nothing short of epic in the first half of the year. We expect this momentum to continue through the second half of 2021 buoyed by M&A dry powder in the SPAC market and lofty valuations driving IPO, M&A, and divestiture activity, particularly in the semiconductor, e-commerce, content, and fintech spaces.”

—Alan Jones, Bay Area Northwest Market Managing Partner

Key deal drivers

SPAC boom or bust?

Capital availability from a variety of sources will continue to enable deals in 2021, but an abundance of players is increasing the competition for assets, and that will likely keep valuations high. With many deals commanding top dollars, the pressure is on to find deals that have value and are not overpriced. So far in 2021, there have been 330 SPAC IPOs that have raised a total of over $90 billion, and 132 SPACs announced mergers worth $257 billion. Thirteen SPACs completed mergers in the tech sector with a total M&A value of $33 billion. This is essentially dry powder for M&A in the form of equity that can be leveraged to complete a merger.

There are approximately 153 SPACs — with a combined buying power of $44 billion — that have indicated a preference to merge with a technology, media and telecom (TMT) company. While we have seen SPAC activity stall since March 2021 due to potential changes in the US regulatory environment, many of these companies are becoming desperate as their opportunities dry up. Given the significant dry powder and strong incentive SPACs have to close a deal, we will likely continue to see significant activity in this space during 2021.

Geopolitics, regulations impact Big Tech

As the globalization versus protectionism debate continues in the US and other countries, a key business issue will be balancing efficiency with agility and resilience. The new presidential administration and shift in political power have brought heightened scrutiny from lawmakers that could potentially disrupt the tech sector’s investments and operating strategies.

We have already seen CEOs of the Big Tech firms come before Congress this year to discuss the extent of influence their platforms have over freedom of speech and their role in spreading disinformation across the internet. More congressional testimony is slated for this summer from the Senate Judiciary Antitrust and Competition Subcommittee focused on “competition concerns” related to emerging smart home technologies.

Antitrust has become the key focus for several lawmakers as they urge the Department of Justice to block Big Tech from their blockbuster deals. We’ve already seen this with the obstruction of the Visa-Plaid acquisition, as well as with the latest outcry from the House Judiciary Antitrust Subcommittee on the announcement of Amazon’s proposed acquisition of MGM. With heightened oversight, we could see a drop-off in transformational megadeals in the second half of 2021.

Startups within corporates

As large corporations acquire early stage companies, they continue to find innovative ways to maintain the culture of the target firm. To attract top talent and retain key employees, employers are creating compensation structures that align the employee with the long-term value and interests of the specific venture. The employees are compensated through equity-based programs tied to the success of the specific venture business, as they would be with any other startup.

The companies know that in order for these ventures to be successful, the workers need to put in as much effort as they would with any early-stage tech company. However, to attract these individuals, the payout will need to be a share in the upside. These structures can be difficult to maintain and monitor, and only time will tell how successful they are in attracting and retaining key talent, which is critical to the success of any M&A transaction.

Transform with fintech

The pandemic not only accelerated the digital economy, but it also challenged companies in many sectors to be more innovative in how they deliver products and services. New disruptive business models continue to arise, including digital transformation, which can provide a better customer experience.

A prime example of this is the fintech sector, where there are increased investments and partnerships. Companies like Facebook (Diem, Curacel, Clearwater Analytics), Amazon (Synchrony Financial, Acko), Apple (Apple Card, Mobeewave), Microsoft (Paysafe) and Google (bank partnerships, mobile banking) are investing in or partnering with various fintech companies and start-ups.

In the process, they have raised customer expectations by delivering efficient, personalized ecosystems to captive audiences that may be inclined to purchase new financial services through these firms. We expect this trend to continue with more non-financial services companies looking for deals to incorporate financial services as they seek new revenue streams and look to expand their ecosystems.

Contact us

Marc Suidan

Marc Suidan

Deals Principal, PwC US

Sundar  Ramamurthy

Sundar Ramamurthy

TMT Deals Principal, PwC US

Alan Jones

Alan Jones

Bay Area Northwest Market Managing Partner, PwC US

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