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Technology: Deals 2022 outlook

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What's driving deals in 2022

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.

Insights into 2021 technology deals

Deal volume continued to be high during the first three quarters of the year, totalling about 1,600 deals — more than in all of 2020. The deal pace remained robust in the fourth quarter of 2021 (from October 1 to November 11), totaling 149 deals. Deal value for the tech sector in 2021 was $293.2 billion, with $70.5 billion, $102.3 billion, $78.8 billion and $41.7 billion in the first, second, third and fourth quarters, respectively. The increase in overall deal value in 2021 compared to 2020 is partly due to the number of megadeals, up from 10 in 2020 to 19 in 2021. With a combined value of approximately $180 billion, megadeals made up about 60% of total deal value.

Technology deals outlook

With nearly half of the fourth quarter to go, overall deals activity in 2021 is up 30% year over year, setting a brisk pace moving into 2022. The tech sector continues to provide compelling differentiation to buyers in other industries, which we expect to propel tech M&A in the year ahead. An extended rally in the stock market and lofty valuations has not dampened tech sector M&A activity (data for fourth quarter is partial).

Private equity continues to invest heavily in the tech sector, as indicated by the $78.8 billion in the third quarter of 2021, a large sequential increase over the $68.5 billion in the third quarter of 2020.

However, risks remain: Looming regulatory scrutiny and the potential for government intervention may soften deal activity in 2022. More potential legislation is coming — coupled with larger budgets for agencies to enforce antitrust laws — and that could impact M&A activity significantly.

“Deals activity in the tech sector continued at a frenetic pace in the second half of 2021. We expect this momentum to carry into 2022 fueled by ample corporate and private equity balance sheets, ‘ticking clocks’ in the SPAC market and divestitures as a result of antitrust and activist scrutiny, as well increased M&A activity, particularly in content, crypto, digital assets and anything ‘-tech’.”

— Alan Jones, US Technology, Media and Telecom Deals Leader

Key deal drivers

Tech in everything

Despite the 13-year bull market and with valuations at an all-time high, there appears to be no imminent slowdown in M&A activity in the tech sector. Ample private equity investment coupled with rising corporate cash balances and the emergence of special purpose acquisition companies (SPACs) have companies of all industries seeking to differentiate themselves with tech acquisitions. A few notable trends are listed below.

User growth and building a platform company. There is a war for eyeballs in the tech space where companies are looking to both expand their user base and create a broader platform through acquisition of content. The union is sound: Companies may have a strong existing user base but need content or complementary business models to sustain or expand membership, while content owners are looking for innovative ways to monetize. This makes myriad potential combinations possible and we expect to see companies across industries and subsectors get hitched and create broader platform companies, often in surprising ways.

Cryptocurrency and digital assets. Traditional finance companies seeking a cryptocurrency foothold are bolstering their core businesses through M&A. Companies across industries are attempting to incorporate and monetize non-fungible tokens (NFTs) as a component of their core businesses. We expect an acceleration in crypto-related IPOs and acquisitions as that technology and digital assets gain broader mainstream acceptance.

/Tech. Digital health care, fintech and autotech have exploded, and the pieces are everywhere. With significant market fragmentation and crowding in health care; innovative “asset-light” models within fintech; and the continued proliferation of electric vehicles, particularly through de-SPAC transactions, we anticipate IPOs, deal-making and consolidation in these subsectors in the years ahead as leaders are defined, investor sentiment and expectations evolve and new trends emerge.

Dealmakers consider ESG

Public interest in environmental, social and governance (ESG) investing is skyrocketing in 2021, and institutional asset managers are placing sustainability and social impact at the core of their investment process. This movement is putting investor pressure on tech to avoid unfavorable headlines, and it’s sparking introspection in the way tech companies operate and the roles they play in society. The new focus on culture and company purpose is becoming increasingly prominent in the psyche of dealmakers.

On the cultural front, technology companies are performing thoughtful analyses of how organizations will integrate post-deals. No one wants to buy a culture clash or surprise stakeholders or shareholders, so technology companies focus on ensuring that traits such as teamwork, autonomy, adaptability and work experience integrate seamlessly, as well as broader approaches to environmental and social responsibility.

Understanding the ESG dimensions of a potential acquisition is important to ensure there is an alignment of purpose and that there are no attributes that may increase risk and potentially trigger negative investor or stakeholder reactions, compromising the overall value of the deal. 

Red light, green light

The regulatory conditions for tech are rapidly evolving due to increased government and public focus on competition. As the tectonic plates shift between the US Department of Justice (DOJ) and Big Tech, it’s unknown whether the pressure will dissipate or companies will crack apart. Either way, we expect the outcome to crystalize, providing certainty for the industry and having an overall positive effect on M&A activity heading into 2022. We also anticipate potential increased divestitures related to antitrust, stressing the importance of sell-side agility on financial information and reporting requirements.

In October, the Federal Trade Commission (FTC) announced a new policy requiring buyers that attempt a potentially anticompetitive acquisition to obtain prior approval from the commission before undertaking a future transaction in a similar market. If an acquisition is challenged, the policy could significantly delay or derail the acquisition process for tech buyers that are attempting to acquire multiple targets in a similar market.

Guidance issued by the Securities and Exchange Commission (SEC) contributed to a big chill in the SPAC market in the second half of 2021. While economic conditions, the level of redemption activity and overall asset class performance played a role, there also was a freeze as SPACs scrambled to check the classification of their warrants. Whether due to SEC scrutiny or other factors, the second half of 2021 saw a significant slowdown in de-SPACs and new SPAC formation. 

Breaking up is hard to do

The government is watching. From the FTC to the DOJ, the US government has escalated its scrutiny of some companies’ size and dominance, particularly within the tech sector. There’s no question that corporate consolidation has increased, and for many large companies — especially those that may want to acquire others in the years ahead — splitting up or slimming down could reduce regulators’ attention.

Shareholders also want better results — and soon. Public companies have always had an obligation to deliver positive returns for investors, but the rise of shareholder activism has raised the stakes. Many investors who have consolidated shares in companies have gained more influence and often are willing to challenge traditional business strategies. Aggressive moves to reconfigure an enterprise could be applauded.

As both regulatory and activist activities heat up, tech companies are looking to develop a proactive divestiture strategy to support long-term growth in any regulatory environment. By looking to divest to reinvest, tech companies are setting the detonators for future divestitures through segmentation of existing management reporting. With valuations at an all-time high, we expect ample opportunities for tech companies to shrink-to-grow, creating the agility to invest in new or emerging opportunities to drive shareholder value.

Contact us

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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