Despite a slowdown in the second half of the year, 2019 still edged out 2018 in terms of total deal value. After a very strong start in 2019 that saw 825 completed transactions in the first two quarters for a total deal value of $174 billion, deals in the second half of 2019 decelerated as macroeconomic, geopolitical, and regulatory uncertainties weighed down potential acquirers. Private equity was the bright spot in an otherwise tepid fourth quarter, as low interest rates persuaded private equity investors to step back into the market and complete 49 transactions for a total deal value of $19.3 billion, or 42% of total deal value in the fourth quarter.
2020 will likely be an exciting year as we see how investors react to developments in the U.S. presidential election, ongoing trade wars, and conflict in the Middle East. In the near-term, we expect the current M&A landscape to endure, as acquirers deal with rising valuations and a growing wall of economic worry. That being said, we believe technology deals will continue to drive the M&A market as companies look to expand their capabilities and increase their scale through acquisitions.
“Despite a large decline in deal value and volume in the second half of the year, 2019 was still a standout year. The fundamentals for 2020 look healthy and reasonable given pre-IPO valuation adjustments.”
Similar to the previous quarter, deal value in Q4 2019 was subdued at $45.9 billion, as corporate buyers avoided making significant acquisitions. Despite the slowdown in the fourth quarter, deal value in 2019 still saw a slight uptick of 8% from 2018 despite an 11% drop in deal volume for the year. The decline in deal volume was more than offset by an increase in average deal size of 40%.
Mega deals were a significant driver of deal value for 2019, making up 56% of total deal value, compared to 46% in 2018. Similar to the prior three years, there were 10 mega deals in 2019. However, the total value of mega deals increased by 32% compared to 2018, largely due to significant mega deals in the payments processing space.
Private equity saw a substantial increase in activity in 2019, with total deal value of $51.7 billion, which was 42% higher than 2018. Similar to their corporate counterparts, PE buyers largely focused on software acquisitions with 54% of deal volume and 65% of deal value concentrated in software.
Continuing a trend that started in 2018, software was the most active sector in tech with 854 transactions for a total deal value of $180 billion, contributing to 52% of deal volume and 69% of deal value in 2019. 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.
Artificial intelligence was a driving force behind several deals, with two of the top four transactions in the semiconductor space being AI related (Nvidia’s $6.8 billion acquisition of Mellanox and Intel’s $2.0 billion acquisition of Habana Labs). On the software side, AI companies were popular targets as companies were looking to enter new markets (VMWare’s acquisition of Carbon Black), expand capabilities (Salesforce’s acquisition of ClickSoftware), and innovate new technologies (Facebook’s acquisition of CTRL-labs).
Semiconductors came in a distant second in 2019 in terms of deal activity, with 52 deals for a total deal value of $29 billion. Consolidation in the semiconductor space continued in 2019 as several less diversified companies were greatly impacted by the softness in the chip market and ongoing trade war with China.
The IPO market mirrored the M&A markets, as both the number of transactions and the amount of capital raised were lower in Q4 2019.
After raising a record high $16.1 billion in Q2, IPO proceeds contracted in the fourth quarter to slightly less than $1 billion. This decrease was a result of increasing investor distrust after the lackluster post-IPO performance of several highly anticipated unicorns such as Uber, Lyft, and Slack. The lack of confidence in the IPO markets was highlighted by WeWork’s failed IPO, which put into doubt the valuations of several other VC-backed investments. Despite the slowdown in the fourth quarter, IPO proceeds for 2019 was still over 50% higher than 2018.
VC investments also saw a decline in activity as both global and US VC funding fell 16% in Q4 2019 compared to the previous quarter. Financing rounds with $100M raises also declined sharply from 58 in Q3 2019 to 38 in the fourth quarter. Despite this, 2019 was still the second best year in terms of $100M+ rounds, and third best in terms of total funding, falling short of the capital invested in 2000 and 2018. In terms of venture backing in the tech space, internet startups saw the majority of funding, with 574 deals and $10 billion invested. Software came in second at 135 deals with $1.8B in funding.
After a blistering start in the first half of 2019, deal activity saw a substantial decline in the second half of the year. Mega deals, which started the year at five deals with a combined deal value of $75.5 billion, fizzled throughout the year, and ended the year at just one deal for $6.0 billion in the fourth quarter. The year saw investors beset with a host of worries, including a slowing economy, elevated valuations, trade tensions, political uncertainty, and increasing regulatory demands. Increased deal scrutiny by regulators also created an additional dent in deal activity and slowed things significantly. Despite all of these issues, 2019 was still a fantastic year in terms of M&A, IPO, and VC activity. Overall deal value was the highest it has been since 2016 at $259.5 billion. Similarly, the IPO market had a bumper year, with 42 tech IPOs raising total proceeds of $23.5 billion, the highest amount since 2014, while VC investments were the second highest since 2000.
Entering into 2020, investors will have to continue to contend with these concerns, in addition to the building conflict in the Middle East, Brexit, and uncertainty related to the upcoming presidential election. However, strategic acquirers will continue to be focused on their growth agenda and will
likely maintain deal activity. Heading into 2020, we expect the deals environment to remain stable at current levels. The next noteworthy catalyst will be the signing of a phase 1 trade deal with China, which should bring more stability to the macroeconomic environment. In addition, there remains approximately $2.4 trillion of capital from PE buyers that will need to be deployed, which coupled with record low interest rates, will incentivize PE buyers to deploy capital like they did in the fourth quarter of 2019. US corporations are also holding another $2.2 trillion in capital, which will give them an opportunity to continue pursuing deals. We expect that given the elevated valuations in public markets, tech buyers will continue to outshine non-tech buyers for tech deals, since they are better able to take advantage of synergies to justify the higher valuations.
On the IPO front, it may take time to convince investors to wade back into the IPO market. To win investors’ trust, companies will need to have a credible path to profitability. Investors in IPOs have shifted from revenue growth at all costs to revenue growth with a positive gross margin story, and eventual scale to achieve operating margin profitability.
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.
Technology, Media and Telecommunications Deals Leader, PwC US
TMT Deals Principal, PwC US