Technology: Deals 2022 midyear outlook

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Insights into 2022 technology deals

Deal value for the first half of 2022 was $272.4 billion, with $173.3 billion in the first quarter and $99.1 billion in the second quarter. The increase in overall deal value in the first half of 2022 compared to the first half of 2021 — $172.8 billion — is partly due to the number of megadeals. The first half of 2022 featured 14 megadeals, with a combined deal value of about $226.8 billion and more than 80% of total deal value. Deal volume was lower during the first two quarters of 2022, totalling 677 deals, compared with 1,070 deals for the first half of 2021.

Technology deals outlook

Overall, deals activity in the first half of 2022 is down 37% year-over-year compared to the first half of 2021. The increasingly uncertain geopolitical and macroeconomic outlook has disproportionately impacted the public tech market. While tech buyers have significant dry powder and the lowering of valuations in the public markets should spur potential dealmaking, a similar adjustment is yet to trickle down into the private markets. Private equity players are also being increasingly cautious as interest rates rise. Specifically, the number of private equity acquirers decreased from about 85 firms to about 60 firms from the first half of 2021 to first half of 2022, respectively.

Deal value increased 58% between the first half of FY 2021 and FY 2022, driven by a handful of megadeals, with the top two being the acquisition of Activision Blizzard and Twitter for $68.7 billion and $44 billion, respectively. The average deal size jumped 30%, year over year, to $186 million, one of the highest levels in years. This activity underscores a trend of the large tech companies seeking bigger platforms that can offer consumers a broader suite of services. With the public stock market depressed, this also is a harbinger of more public-to-public deals to come in the second half of 2022.

Looking ahead at IPOs, we expect the public markets to be quiet through Labor Day. The markets will need a jump start from a market-making IPO with cash flow positive measures to revive activity for the technology, media and telecom (TMT) sector. From a SPAC perspective, the market has been buffeted by regulatory pressures. We expect to see a limited number of SPACs continue to bleed across the finish line in the remainder of 2022. Finally, we expect a lackluster IPO and SPAC market to spur M&A activity, as private equity and strategic buyers hunt for fallen unicorns and battered SPACs. We anticipate divestitures will gain momentum as companies seek liquidity and look to rationalize their portfolios.

M&A market fundamentals for the sector are favorable, given the critical business need to keep up with rapid technology innovation and transformation of businesses. In particular, software deal activity is expected to stay hot, with a focus on cloud, analytics, collaboration and security. See, for example, Broadcom’s recent $61 billion acquisition of VMware. While the ongoing tech market valuation correction increases uncertainty, it also creates opportunistic buying that could trigger a wave of tech M&A. 

“While macroeconomic uncertainties pose a threat to dealmaking in the near term, more realistic valuations and a tepid IPO market coupled with strong cash positions of tech buyers will lead a bounce back in M&A.”

— Sundar Ramamurthy, Technology Deal Partner

Key deal drivers

R.I.P. lofty tech valuations?

The recent volatility in US equity markets deflated many technology stocks as investors recalibrated their economic forecasts. The pullback in valuations led to caution in the market, and as a result investors are relying more on fundamental measures of profitability.

This shift in valuation has created opportunities for both strategic and financial buyers, as acquisitions once considered out of reach potentially become attainable.Target companies may need to rethink valuation expectations and transform their business models and operations to entice buyers operating with increased capital discipline. Tech companies seeking to accelerate the selling process may need to evaluate which variables can be optimized to attract a more discerning buyer. 

Pricing unicorns: a trickle-down effect

While public markets for tech companies have faced significant dislocation, private company valuations appear to have held out and new unicorns continue to be minted. It's unclear whether recently announced deals were negotiated prior to the market downturn or reflect current investors' resistance to potential writedowns. What is certain, however, is that a trickle-down effect of changes in the public markets will be reflected in the private markets, affecting existing valuations, access to funding and liquidity alternatives. Tech companies looking to be acquired should consider how to structure the deal in a creative manner that accounts for this significant pricing uncertainty. We expect tech companies to continue to close transactions in 2022, but anticipate that the deal structures will evolve to reflect heightened market volatility. 

Increasing resilience and cybersecurity

Rising cloud adoption, connected devices and work-from-home activity creates challenges in managing cybersecurity risks across multiple infrastructures. With heightened regulation on data privacy and liability, cybersecurity is not only a critical product set but also a centerpiece for building customer trust. In turn, cybersecurity will need to be at the intersection of every technology and service.

While the first half of 2022 saw the notable acquisitions of Sailpoint for nearly $7 billion and Mandiant for $5 billion, the majority of activity consists of smaller companies that provide highly targeted and technical products to address specific cybersecurity needs. Beyond tech firms, both financial buyers and non-security companies are also driving up demand for M&A in this sector.

Dealmakers plan for the metaverse

M&A will be a key avenue for companies seeking to establish a presence in the future metaverse economy. Internet and gaming companies are now viewed as attractive assets: Microsoft noted that its pending $68 billion deal for Activision-Blizzard will help provide the building blocks for the metaverse. As companies ramp up their metaverse plans, they will also be on the lookout for investments in cybersecurity and data management solutions.

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Sundar  Ramamurthy

Sundar Ramamurthy

Principal, PwC US

Alan Stephen Jones

Alan Stephen Jones

Technology, Media and Telecommunications Deals Leader, PwC US

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