Technology: US Deals 2024 outlook

Tech navigating shifting M&A tides

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.

Explore national deals trends

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.​

Key deal drivers

AI generating opportunity amid market uncertainty

In the latter half of 2023, the creation of unicorn startups hit a six-year low, with just 12 reaching this status in Q3, as reported by CB Insights. Nonetheless, the generative AI sector emerged as a standout, with over 10 new unicorns in this field in 2023. These companies drew approximately $19 billion across 198 financing rounds, attracting investments from major venture capital firms and tech giants.

Notably, Alphabet, Amazon and Microsoft have been key investors in generative AI firms like OpenAI and Anthropic. Apple is also actively integrating generative AI into its products and services, with plans to invest about $1 billion annually in this area, according to Bloomberg. Anthropic, Hugging Face and OpenAI lead in funding, collectively securing over $10.5 billion in 2023. Other emerging players such as Adept, AI21 Labs and Inflection are closing the funding gap, backed by corporate venture capital from Nvidia, Salesforce, Workday and others.

As investments in AI and other emerging technologies and technological advancement surge, regulators are beginning to pay attention. Although regulation has been limited so far, policymakers are increasingly concerned with the ethical, legal and societal implications of AI. The industry faces challenges too, as companies strive to foster innovation and growth while mitigating potential negative impacts.

Currently, we're in the investment phase of AI, with expectations for continued investment by large tech firms to ramp up AI investments and strategic AI-driven acquisitions targeting specific business applications. The competition among leading AI companies may trigger a wave of talent acquisitions ("acquihires"). Additionally, the computationally intensive nature of AI, coupled with its expanding applications, is likely to spur acquisitions related to cloud computing infrastructure and supply chain solutions as AI technologies become more widespread.

Capital allocation: How valuation declines are reshaping startup exits

In 2023, private company valuations experienced a downturn compared to their most recent funding rounds. Factors like the compression of public company multiples, a challenging interest rate environment and a tepid IPO market have contributed to this trend. Specifically, companies financed by venture capital (VC), private equity (PE), or growth equity saw their median exit prices in the third quarter of 2023 falling to 30% below their last funding round. This is a steeper drop than in the first half of 2023 and a stark contrast to the premium valuations of 2021 and 2022.

Highlighting this trend, Atlassian's acquisition of Loom in October for $975 million marked a 36% reduction from Loom's last private valuation of $1.53 billion in May 2021. Similarly, HubSpot's November 1 acquisition of Clearbit for $150 million was significantly lower than its 2019 valuation of $250 million.

These lower valuations have spurred an increase in M&A activity recently, a pattern expected to persist into the first half of 2024. Corporate and PE investors, previously hesitant, are now actively investing as startups face cash shortages. In response, startups are shifting focus toward financial sustainability and reducing dependency on external funding. Many are now prioritizing sustainable revenue models and operational efficiencies over aggressive growth strategies. This shift aims to better position startups for future exits, either through IPOs or more favorable M&A opportunities, when market conditions improve.

Tepid IPO market making exits more challenging

In 2023, challenging market conditions, macroeconomic factors and cautious investor sentiment led many companies to postpone their public offerings. But there were notable exceptions. Instacart, a San Francisco-based grocery delivery service, and Klaviyo, a marketing automation firm from Boston, both launched IPOs in September 2023, valued at $10 billion and $9 billion, respectively. Despite initial optimism, the stocks of both companies have since fallen below their IPO prices. ARM, the UK-based semiconductor and processing unit design company, has been an outlier, maintaining its IPO price and a valuation of around $50 billion.

These IPOs have served as critical indicators for other private tech companies considering going public. The lukewarm response to 2023 IPOs has led many to delay their exits, hoping for a more favorable market in early 2024. The window for such exits might be brief because uncertainty surrounding the late 2024 election cycle typically dampens investor enthusiasm due to potential regulatory and economic policy changes.

Given the subdued IPO performance in 2023 and the impending election cycle, there's a growing backlog of companies awaiting IPOs, potentially leading to a spike in IPO activity in 2025. The backlog might also fuel increased M&A activity in 2024, as investors in these private companies seek alternative exit strategies amid IPO uncertainty and delays.

“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.”

— Alan Jones, TMT Deals Leader
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