Technology deals insights
2020 Technology deals insights
As COVID-19 continues to impact the global economy, investors have started viewing the technology sector as a safe haven. Many sectors within technology have either been shielded, or directly benefited from, the ongoing crisis, with the US Nasdaq composite recently hitting all-time highs. However, from a deals perspective, the first half of 2020 saw a meaningful decline in deal value and volume as investors focused on liquidity and short-term protection.
We expect technology deal activity to steadily pick up in the second half of 2020, although global trade frictions will remain a headwind throughout the year. M&A activity is expected to return as companies focus less on capital preservation and start seeking new opportunities. Those companies affected by COVID-19 will take a closer look at their existing businesses to evaluate which areas are core and potential areas to divest.
“Deals volume and value in the first half were negatively impacted due to COVID-19, but July is off to a strong start. With Tech companies feeling better about their revenue outlooks, along with strong Venture Capital funding and vibrant capital markets, we are optimistic that M&A activity will be strong in the first half. Companies are feeling the pressure to maintain their innovation and expand in a virtual and cloud centric world through acquisitions!”
High level trends and highlights
Deal value in the first half of 2020 was subdued at $73 billion, the lowest it has been since tracking began in 2016, as companies cut many forms of spending. Many of the deals that were announced or completed so far in 2020 were transactions which had negotiations that begun prior to the shutdowns and generally involved lower deal values. The slowdown is much more significant when compared to the first half of 2019. While transaction volume is only down 6%, deal value is down 58% due to lack of significant mega deals. This results in a 55% decrease in average deal value from H1’19 to H1’20.
While the number of Mega deals were lower in H1 2020, they still made up 45% of total value compared to 56% in 2019. There was a total of four mega deals in the first half of 2020 for a total value of $33 billion compared to eight for $128 billion during the first half of 2019.
Domestic deals provided the majority of 2020 deal value as three of the four megadeals were domestic including the $13 billion Koch/Infor megadeal.
Outbound and inbound deals in 2020 made up 15% and 14% of deal volume, respectively. Inbound deals accounted for roughly 17% of deal value, largely due to Just Eat Takeaway.Com’s acquisition of Grubhub. Outbound deals accounted for roughly 5% of deal value, largely due to the Zynga’s acquisition of Peak mobile gaming.
Many tech companies are looking to capitalize in underpenetrated markets such as India, but have been met with restrictions regarding acquisitions. Therefore, the large tech companies have made significant investments in Indian companies such as Facebook’s $5.7 billion investment in Reliance Jio Platforms. Similarly, Alphabet has made a commitment to invest $10 billion in India over the next five to seven years.
The IPO market saw improved activity in Q2 2020 compared to a slow first quarter. Although, IPO volume and the amount of capital raised is still substantially below the first half of 2019, which saw the government shutdown impact first quarter IPO volumes.
After three consecutive quarters of low value raises, IPO proceeds grew in the second quarter to over $5 billion. This increase was a result of increasing investor appetite for fast-growing tech stocks following COVID-19. Key transactions through the first half of 2020 include IPOs by Dun & Bradstreet and ZoomInfo Technologies. Both showcasing the value currently being placed on AI and data analytics.
Overall venture capital financing has been strong and we continue to see record valuations in certain industries. However, the valuation of some tech unicorns, impacted by COVID-19, have declined, which may lead to some large tech companies being opportunistic to complete acquisitions. Financing rounds of over $100M set a historic record, jumping to 69 in Q2 2020 for total funding of $12.1 billion, making it the seventh largest mega-round funding quarter ever. In terms of venture backing in the tech space, internet startups saw the majority of funding, with 13 mega-rounds, Stripe highlighting the space with a $600 million round. Software came in second at 3 mega-rounds, with Palantir Technologies leading with a $500 million round. Other sub-sectors seeing increased funding include digital health, where deals were up 9%, and FinTech, where investments were up 47%.
Technology sub–sector analysis
Continuing a trend that started in 2018, software was the most active sector in tech with 437 transactions for a total deal value of $42 billion, contributing to 56% of deal volume and 58% of deal value so far in 2020.
SaaS and data analytics companies continue to be popular acquisition targets, as tech companies continue to expand their capabilities and differentiate themselves from their competitors. Deal activity driven by technology is likely to become more common as companies look to shore up vulnerabilities and capitalize on sector shifts emerging from COVID-19.
Video games has been a hot sector as the quarantined populace sought alternative forms of entertainment. The first half of 2020 already saw several gaming-related acquisitions, including Zynga’s largest acquisition in company history of Peak mobile gaming. We expect continued strong deal activity in this space going forward.
Similarly, there have been a number of transactions in the mobile app-based food delivery provider space. With restrictions in place for indoor dining, food delivery applications have capitalized on the social distancing restrictions. In this fast growing industry, companies are looking to expand their market share. Following DoorDash’s acquisition of Caviar that occurred in 2019, Just Eat Takeaway.com acquired Grubhub with one of the largest acquisitions so far in 2020. In the IPO market, DoorDash has filed a confidential S-1 for an IPO possibly later in 2020.
Technology deals outlook
COVID-19 has had a significant impact on the tech space, accelerating trends that we expect to persist longer term. As a result, we expect many companies will provide more opportunities for employees to work remotely, making tech companies more attractive M&A targets for buyers looking to improve or supplement their existing capabilities.
As companies look to strengthen their market and competitive positioning, it will require rethinking of all aspects of the business from workforce, products and services, end-user experience and how these are all facilitated by a digital platform.
We believe those companies who adopt a structured value creation methodology to identify and articulate the drivers of value created or lost through COVID-19 will be well placed to find opportunity in the tech sector.
We expect FAANGs will emerge stronger from COVID-19 than their less well-capitalized competitors and despite the regulatory scrutiny, we expect them to continue to pursue deals to unlock value and grow through transformative acquisitions. However, fears of increased regulatory scrutiny may block megadeals, with greater focus instead on mid-size assets. More stock-based transactions are likely in the short term as a means to address relative valuation uncertainties and as companies look to preserve cash.
While many enterprise technology companies have benefited from the increasing demand for online and remote capabilities, other sectors within tech will see lower demand as the recession impacts technology spending. Accordingly, tech companies will need to assess workforce levels and non-discretionary spending to maintain operating cash flows and those more significantly impacted may present opportunistic acquisition targets.
We expect to see acquirers take a more deliberate approach to deal-making as the acquisition process transforms in response to COVID-19 and in-person interactions will be replaced with virtual processes to assess talent, evaluate company culture, and execute on a value creation plan. Sellers will need to set up their own virtual process to provide transparency and give buyers comfort in closing the transaction.
We expect the recovery in the financial markets and rising valuations, particularly in technology, to be a strong tailwind for the IPO market. There has been a significant backlog of unicorns waiting to IPO as a result of COVID-19, including Palantir, DoorDash, Robinhood, Databricks, Unity, Tanium, Snowflake, and many others. If favorable market conditions persist, we expect several of these companies to successfully IPO.
While COVID-19 has undoubtedly had a large impact on M&A transactions, we believe many Technology sectors have proved to be resilient and deals will continue to recover through the remainder of 2020.
Sub-sector outlook
While we expect all sub-sectors to show improved M&A activity in 2020, each sub-sector’s deals will be driven by unique factors:
Software deal value decreased dramatically in Q2 2020 by 73% quarter over quarter and a decrease of 70% from the first half of 2019 to the first half of 2020. COVID-19 has boosted enterprise SaaS, cloud, and subscription-based models, with a spotlight on deals in the security space, especially identity protection. This has led to higher valuations and the recent opening of the IPO window for fast-growing companies, we expect more IPO activity in this space in the second half of 2020. The increasing valuation premium of cloud companies over other tech sectors may deter acquisitions.
Internet
- Gaming/Social Media/Streaming - Gaming, online social activities, and streaming have seen higher usage as result of COVID-19, with deal activity in these sub-sectors continuing to be strong.
- E-commerce - Many industries are being forced to shift to virtual operations and online platforms, driving an increase in online activities to new industries such as education, while reinforcing the ongoing digitalization of industries such as retail. Brick-and-mortar retailers, many of whom were struggling to address the e-commerce trends before the pandemic, will need to improve their online capabilities as a means to survive.
IT Services deal value has come down in Q2 after two consecutive quarters of increased activity in this space, but generally in line with quarterly averages and almost double for the deal value for the first half of 2019 attributed to Q1’20’s high deal volume. We expect both value and volume to go up in the second half of 2020 as all other sectors view technology as the essential enabler for digital transformation and growth.
Semiconductors deal activity was essentially non-existent in Q2 2020 which resulted in a 93% decrease in deal value comparing the first half of 2020 to the first half of 2019. Chinese companies are looking to develop more homegrown chips in response to a recent tightening of rules by the US intended to restrict the sale of US semiconductors to China’s Huawei. We expect Chinese inbound investment to the US to be slow as US regulators continue to draw a hard line against the acquisition of any key US technology.
Hardware companies have faced supply chain issues internally, and cost cutting has diminished external demand for hardware products. Given lower valuations in the hardware space, we expect the large tech companies will opportunistically expand their product portfolio through acquisitions.
About the data
We define M&A activity as mergers and acquisitions where targets are US-based Technology companies acquired by either US or foreign acquirers, or targets acquired by US-based Technology companies. We define divestitures as the sale of a portion of a company (not a whole entity) by a US-based seller. We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on officially announced transactions, excluding rumored transactions, as provided by Thomson Reuters as of December 31, 2019, and supplemented by additional data from CapitalIQ and our independent research. Information related to previous periods reflects data available at that point in time and is not updated based on new data collected by Thomson Reuters. Unless otherwise noted, all data and charts included in this report are sourced from Thomson Reuters.
Because many Technology companies overlap multiple sectors, we believe that the trends within the sectors discussed here are applicable to other sectors as well. Technology sectors used in this report were developed using NAIC codes, with the Semiconductor sector being extracted from semiconductor and other electronic component manufacturing codes with reference to SIC codes. In certain cases, we have reclassified deals regardless of their NAIC or SIC codes to better reflect the nature of the related transaction. For transactions where the buyer and target are in different industries, the announced acquisition is counted in both industry deal reports. To combine deal value or volume across reports, one should eliminate the double-counted deals.
IPOs with deal values that are less than $25mm, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded.
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