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!”
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.
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.
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.
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.
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