Technology: US Deals 2023 midyear outlook

A continued tech M&A slowdown, but an optimistic outlook

In 2023, public companies in the tech sector slowly inched their way back up from lows, battling against lower domestic revenues as consumers curb spending behaviors due to increasing prices, lower international revenues as the dollar becomes more expensive, and higher expenses as supply chains continue to recover from pandemic shocks. Investor confidence and optimism surrounding tech company proactiveness was offset by the market volatility brought on by bank stress and compounded by persisting inflation and ongoing global geopolitical tensions. Facing investor pressure, conservatism has seeped into the management and boards at many tech companies, who have been orchestrating various cost-cutting measures to counterbalance macroeconomic setbacks as well as course-correcting pandemic hiring activity associated with growth initiatives.

Big tech companies continue to face pressure from regulators around the world due to potentially anti-competitive behavior and data security concerns. In the social media space, Meta was forced to sell Giphy due to the UK competition regulator blocking the deal. Despite those pressures, we do see a good probability of one of the largest tech deals in history closing in the second half of the year, as Microsoft receives approvals, relating to its acquisition of ActivisionBlizzard, from regulators in the EU, Japan and China, among others, after challenges domestically and in the UK.

Large corporates, armed with balance sheets healthier than those seen in previous recessionary periods, continue to contemplate strategic acquisitions in the back half of 2023, pending macroeconomic conditions. Financial sponsors, sitting on relatively high amounts of uninvested capital, will also look to take advantage of attractive valuations this year and engage in take-private deals with companies they believe the public markets have punished too harshly. Despite high amounts of dry powder, increasing interest rates have led to increased debt rates so financial sponsors may play the waiting game until conditions ease, or consider creative transaction structures.

Explore national deals trends

The first half of 2023 did show signs that private equity is still finding ways to deploy their capital despite the debt rate headwinds — although private equity’s share of total Q1 2023 deal volume was only around 10%, its share of total Q1 2023 deal value surpassed 60%, driven by high-value tech deals such as Symphony Technology Group’s $1.5 billion acquisition of Momentive and Silver Lake’s $12.5 billion announced all-cash acquisition of Qualtrics.  

Overall, we note the prevalence of a cautious optimism in tech M&A, accentuated by 20% and 40% increases in volume and average deal size, respectively, in Q1 2023 (excluding megadeals). Financial sponsors are leading the charge and starting to sweep up companies whose valuations have dropped dramatically from 2021 and 2022 highs, while strategic acquirers exercise patience and remain selective until macroeconomic conditions further stabilize. As of mid-May, total deal volume in the first half of 2023 is still only 50% of what was transacted in the second half of 2022, but we are seeing corporates starting to step in and become comfortable doing deals relative to the low levels in Q4 2022.

Looking ahead, the future is improving, and we expect to see continued upward momentum in the tech sector, stemming from an environment conducive to both compressed multiples, competitive technological innovation and a backlog of IPO candidates.

Enhancing the core technology platform

Companies face markets being reshaped by technology and disrupted by geopolitical unrest, a global pandemic and economic shocks. As a result, CEOs are turning to transformative acquisitions to reposition and reinvent their businesses for long-term success. Companies are also beginning to crack the code on how to make big, transformative deals successful: leveraging experience, early and sustained investment in integration, and a commitment to creating and implementing new long-term operating models.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers

Necessity for business reinvention

There’s been a significant uptick in the prevalence of AI implementation across industries, driven by the technology’s inherent potential to provide meaningful insights, generate cost efficiencies and foster unprecedented levels of convenience in business operations.

Interest and activity across investors, users and developers relating to AI has undoubtedly increased within the tech sector over the last decade, culminating in the watershed moment in November 2022 with the release of ChatGPT.  The release of the technology, while still in its early stages, has created a new excitement for the future of AI and its potential — pivoting the concept from a fringe use case, to a primary business driver. Businesses across all industries (including PwC) have had to contemplate and strategize about the potential impact of AI on their core competencies and underlying business models, as well as the futuristic opportunities that it creates.

The world has taken notice, spurring significant investment throughout the first half of 2023 with AI being a bright outlier in a cautious tech environment. This investment has been in many forms: public market price expansion, strategic partnerships, acquisitions and start-up investments. Not only did companies focus on large partnerships and investments, but the release of ChatGPT also spurred corporate M&A activity such as Quantexa and McKinsey, who acquired Aylien and Iguazio, respectively, in Q1 2023. OpenAI, the company behind ChatGPT, has dominated the headlines, but there are still dozens of other private companies focusing on the space such as Hugging Face, Jasper and Perplexity AI, each with its own AI solution targeting unique applications across various industries. In the public markets, companies featuring AI have seen increases to their stock prices as investors are excited for the potential value AI may bring., one of the few public players specializing in AI and trading on the NYSE, was up ~200% through the first quarter of 2023.

With private AI companies readily securing funding led by today’s tech giants and most reputable investment firms, the optimism surrounding the seemingly boundless opportunities within this space is at an all-time high. The increased prominence in the sector is expected to drive future M&A activity as companies try to position themselves for a future where AI is the start of a new technological growth phase.

In this evolving technological and economic environment, successful leaders know that smart management of their business portfolio is critical to delivering positive returns to shareholders. A recent PwC study explores the wide range of internal and external influences that affect the speed and effectiveness of portfolio decisions and divestitures — offering insights into how companies can reinvent themselves through M&A.  

Capital allocation

After a brief hiatus, private equity activity is picking up in 2023 as public valuation multiples continue to stay below historical levels. The back half of 2022 saw large private equity deals of software companies such as acquisitions of Citrix ($16.5 billion), Anaplan ($10.7 billion), Avalara ($8.3 billion), Sail Point ($6.9 billion), KnowB4 ($4.6 billion), Ping Identity ($2.7 billion) and ForgeRock ($2.1 billion). With multiples still compressed, private equity has continued to seize the moment in the first half of 2023 with notable acquisitions of Qualtrics ($12.5 billion), Coupa ($8 billion), Cvent ($4.6 billion), Duck Creek ($2.6 billion), Sumo Logic ($1.7 billion) and Momentive Global ($1.5 billion). Combined with the last half of 2022, PE deals for public SaaS companies totaled around $82 billion in deal value across 13 deals — marking a continuing trend in go-private SaaS transactions.

While strategic acquirers in the SaaS space have been focused internally on driving cost efficiencies versus externally on M&A, private equity has appeared to not have missed a beat — particularly Vista Equity and Thoma Bravo — each responsible for several of the aforementioned acquisitions.

For private equity buyers, the SaaS business model presents an attractive opportunity. Many of these companies feature highly predictable and recurring revenue streams, some with net retention ratios greater than 100%. Further, they often feature an attractive billing cycle with many contracts getting paid at least annually, upfront. SaaS companies are also extremely capital light. The combination of these factors lend themselves to predictable cash flow management and potential debt leverage.

From a scale standpoint, many of these SaaS companies have been operating for several years and already have a fully developed sales and retention motion, robust pipeline and typically a fully scaled product — i.e., the investment phase is winding down or largely over.  As that phase ends, SaaS businesses are then focused on driving economies of scale as a singular product platform supports an increasing customer base. Many public software companies have long focused on growth over profitability — fueled by investor demand — and thereby reinvestment those economies of scale and chased white-space at the expense of profit margins. However, private equity is seizing the opportunity to take advantage of turning investor tides — with high revenue multiples now being awarded to the SaaS companies that have scaled and show margin improvement.

Given the attractiveness of SaaS companies at the current multiples, we anticipate take-private deals to continue, despite a high interest rate environment, and be focused on companies with high organic net retention rate and entrenched business products.

Opportunity amid uncertainty

A lack of venture capital funding may have regenerated interest in the public market for start-ups looking for funding, many of which have shifted focus from “growth at all costs” to “finding a path to profitability”.

Mobileye, which debuted on Nasdaq in Q4 2022, has seen its share price rise over 30% since its IPO to mid-May, a positive sign pointing to rebounding optimism for the right company. Nextracker’s upsized $638 million public offering at the beginning of 2023 and continued strong stock price performance has also generated some initial optimism toward a return of investor confidence in the US tech IPO market after a prolonged period of uncertainty, layoffs and lackluster performance. SoftBank Group chip maker Arm filed confidentially to go public in the first half of 2023, and the tech world is expecting it to be a litmus test for investor appetite given the fundraising size is between $8 billion and $10 billion.

Globally, there are estimated to be over 1,000 private companies with billion-dollar valuations or higher. While not all are ready for the public markets, there’s an increasing backlog of companies waiting for the IPO window to reopen. With a significant volume of global private unicorns in queue, and pent-up yet cautious demand from institutional investors, the second half of 2023 is expected to have additional candidates test the waters, especially if equity markets rebound or show signs of stability. Historically, IPO slowdowns typically take time to recover (12 to 36 months), but upon recovery, the IPO window reopens quickly. The size and scale of the private market queue is larger than ever, positioning 2024 to be a potentially blockbuster year.

Cybersecurity demand drives cross-border M&A

In the past decade, Israel’s start-up cybersecurity industry has seen a notable rise in fundraising and it’s been a focal point for M&A activity for domestic tech companies looking to expand on their security solutions or shore up potential whitespaces in their product portfolios. Late 2022 saw the Israel-based acquisitions of Siemplify by Google, Cider Security by Palo Alto Networks and CyberMDX by ForeScout Technologies, among others, leading many tech companies to eye cloud security enhancement.

This trend maintained the momentum in 2023, with strong M&A activity focused on development of zero trust network access (ZTNA). In the first quarter of 2023, Hewlett Packard Enterprise acquired the Israeli cloud security company Axis Security to expand and unify its secure access service edge (SASE) solution, a multifaceted network security architecture that includes ZTNA. Around the same time, Cisco acquired Israel-based Lightspin Technologies, which specializes in end-to-end cloud security posture management (CSPM) across cloud-native resources.

As employees everywhere access company data across multiple devices as part of their day-to-day work, cybersecurity will continue to be front and center as an important measure against risk.

“While 1H2023 has been slow, deal activity is expected to recover towards the later part of 2023.”

— Sundar Ramamurthy, Principal
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