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In the first half of 2023, technology mergers and acquisitions (M&A) activity continued its slowdown, mirroring the levels of the last quarter of 2022. In response to the Federal Reserve's interest rate hikes, some companies were more conservative in their M&A strategies, focusing instead on improving profitability and consolidating existing market positions rather than exploring new markets.
However, the second half of 2023 saw a resurgence in M&A activity, with the volume of deals rebounding to the highs of 2021 and 2022. Despite this increase in volume, the overall value of deals remained below past averages, even considering Cisco's significant $28 billion acquisition of Splunk, which constituted nearly half of the third quarter’s total deal value. This indicates a trend of transactions occurring at lower valuations.
While the Cisco-Splunk deal highlights continued interest in large-scale acquisitions, market volatility and changing investor attitudes are still major obstacles. Consequently, the focus has shifted towards smaller, more incremental acquisitions. In 2023, the average deal size dropped by 27.4% compared to 2022, reflecting a preference for less transformative and more financially prudent transactions.
Looking forward to the first half of 2024, the M&A market is expected to remain subdued. However, continued low valuations and financial challenges for start-ups may drive an increase in deal volume, albeit at lower prices. With lackluster IPO performance in 2023 and the upcoming election cycle, a backlog of companies waiting to go public is building. However, the backlog may drive heightened M&A activity in 2024, as investors seek alternative exit strategies.
Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.
“The landscape of technology M&A and IPOs in 2023–2024 is marked by cautious optimism amid challenging macroeconomic conditions. We've witnessed a notable shift in valuation strategies, with private companies adjusting to a new reality of lower valuations. The generative AI sector emerges as a beacon of growth. The rise of groundbreaking unicorns and the influx of significant venture capital are defying broader market trends. However, the tepid IPO market and looming election uncertainties suggest a potential surge in pre-IPO backlogs, setting the stage for a surge in public debuts in 2025 and increased M&A activity.”