While the first half of 2022 continued a banner run for technology mergers and acquisitions (M&A), tech deals activity plummeted in the second half of the year. Despite this downturn, overall levels of dealmaking in the tech sector in 2022 were still historically high with a total deal value of $333 billion — albeit 85% of it occurring during the first half of the year. Total deal value year over year increased by $24 billion, driven primarily by 14 megadeals in the first half of 2022. In the second half of the year, buyers and sellers struggled to come to terms with an uncertain dealmaking environment, given a reset in valuations and the impact of broader macroeconomic conditions — primarily inflationary pressures, tightening monetary policy and corporate restructuring.
As broader sentiment shifted, deal value declined 60% in the third quarter. However, deal volumes spiked 40% quarter over quarter as investors scrambled to close smaller transactions. The deals market essentially froze in the fourth quarter with both deal value and volume decreasing 83% and 57%nt, respectively. As we look forward, valuation pressure and macroeconomic challenges are expected to continue to provide headwinds to the deal market, but we see some green shoots that may drive deals activity, particularly divestitures, take-private transactions and transformative acquisitions.
At the onset of the pandemic, the world witnessed an unprecedented migration towards online activity and a surge of e-commerce resulting in supercharged technology growth rates and valuations. Low interest rates fed a frenzy of activity in the tech sector in 2021 and the first half of 2022, as companies with potentially transformative business models but uncertain future earnings offered a compelling value proposition to investors. That trend has now reversed and tech valuations have declined precipitously.
With the Federal Reserve signaling that interest rates may remain high for the foreseeable future, the rise in the opportunity cost of capital on a risk-adjusted basis has caused tech companies to pivot from “growth at all costs” to focusing on the path to profitability and positive cash flows. As a result, several tech companies began corporate restructurings during the second half of 2022, freezing or pausing hiring and laying off employees.
The tech M&A market was not immune to these broader valuation and macroeconomic challenges as total deal volumes decreased 25% year over year, with a steep decline in the fourth quarter of 2022. The first half of 2022 was dominated by megadeals, including such headline deals as Activision Blizzard and Twitter for $69 billion and $44 billion, respectively. Megadeals tailed off in the second half of 2022 with the largest being Adobe’s acquisition of Figma for $19 billion. Excluding megadeals, average deal size increased modestly year over year to $392 million.
Private equity firms are sitting on substantial dry powder, but rising interest rates and scarcity of available debt financing has tested the ability of private equity firms to sustain their recent frenetic level of dealmaking. We’ve seen private equity buyers temporarily pump the brakes on tech megadeals. However, private equity firms continue to do tech deals, as their share of deal value (excluding megadeals) increased 51% year over year. We expect private equity firms to continue to pick up fallen unicorns and de-SPACs as valuations continue to compress, providing potential opportunities for an increase in take-private transactions in 2023.
The de-SPAC and tech IPO markets have also felt the broader chill of the equity markets. SPAC transactions accounted for just 2% of total tech deal activity in 2022, which — absent structural and regulatory changes — may be the proverbial swan song for this class of SPACs. The last domestic issuer tech IPO was in January — a drought lasting more than 300 days. However, we do see potential green shoots as tech companies are beginning IPO preparation with a view to entering the capital markets in the second half of 2023 and early 2024.
Looking ahead to 2023, we expect deal size and the level of megadeals to continue to decrease as liquidity remains tight and financing options stay limited. Not all is gloomy however, as there are numerous opportunities for buyers to capitalize on valuation resets and potentially bolster their business with complementary technologies, workforce and competencies — all at potentially historical bargain prices. Companies positioning themselves to win the next economic cycle will not sit out this M&A cycle, but rather use it opportunistically to strengthen business. Dealmakers will definitely need to be discerning and scrupulous in their diligence, but we anticipate an uptick in deals activity in 2023, particularly in divestitures, take-private transactions, and transformative acquisitions.
Successful companies actively manage their portfolios of businesses, identifying those with the greatest growth prospects and divesting others that no longer fit their overall strategy. Divestitures also create value for companies in times of economic uncertainty. Those that divested in previous recessions were able to focus on their core businesses and boost cash flow following the sales, especially companies that were under earnings or cash flow pressure. The right deal can help companies keep ahead of the competition and can help companies transform faster, emerge stronger and even become more profitable. In our upcoming divestiture study, 58% of technology, media and telecom (TMT) sector respondents reported a greater than 5% return on their divestitures.
Despite this, many tech companies are reluctant to divest as our divestiture survey also indicated that only 35% of TMT respondents actively embrace divestitures as part of strategic decision-making. This reluctance may lead to a lack of timely divestitures and a corresponding loss of opportunity for potential value creation for shareholders and stakeholders.
Looking to 2023, whether tech dealmakers have historically embraced divestitures or not, we expect divestiture activity to pick up dramatically as investor and shareholder expectations pressure companies to perform portfolio analyses, look for additional sources of liquidity, trim operations to boost profitability and anticipate or react to activist or regulatory pressures.
“As we look forward to 2023, valuation pressures and macroeconomic challenges are expected to continue to provide headwinds to the broader tech deals market, but we see several green shoots that will drive M&A activity, particularly divestitures, take-private transactions and transformative acquisitions.”