Technology deals insights: 2021 outlook

2020 Technology deals insights

Deal value started 2020 with the lowest it has been since 2016, as companies reduced or eliminated many forms of spending in response to the pandemic. After a few months of adjusting to the crisis, low interest rates — coupled with a potential vaccine in sight — improved M&A activity dramatically in the second half of the year. Deals include 14 mega deals (for a total value of $192 billion), compared to just four mega deals (totaling $33 billion) in the first half of 2020. But deal volume stayed low compared to prior years.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021. Explore national deals trends

Technology deals outlook

While the pandemic has hurt the broader economy, the technology sector has been less impacted, as consumers and businesses have looked for technology solutions to support new ways of working and living. As a result, tech deal-makers appear to have increasing levels of optimism, which could lead to record-breaking activity in 2021.

COVID-19 has acted as a catalyst for trends we expected to see later in the future. As a result, many companies are shifting to remote work for the longer term and need to pivot to SaaS-based offerings. That’s making tech companies attractive M&A targets to supplement companies’ existing capabilities.

We expect the tech sector, specifically SaaS, to continue to be a hot market as the shift to the cloud accelerates. A K-shaped recovery has divided the industry into “winners” and “losers,” as the larger well-capitalized companies will look to grow through transformative acquisitions and acquire competitors that are less equipped to weather the storm.

Capital will continue to flow easily in the tech sector, as indicated by the record VC funding in Q3 2020, which was one of the highest quarters ever, second only to Q4 2018. We expect this trend to continue into 2021.

On the downside, new laws and greater regulatory scrutiny have the potential to reduce activity and hamper FAANGs from closing deals in the new year. President-elect Biden has vowed to get tough on big tech and has pledged to raise the corporate tax rate. However, continued global uncertainties may prevent Biden from cracking down on big tech in the near term.

“The outlook is clearly ramped-up acquisitions to help companies accelerate their repositioning into SaaS, or to capitalize on the new ways of working and living in a COVID-influenced world.”

Marc Suidan, US Technology, Media & Telecommunications Leader

Key deal drivers

Gaming: The new happy hour

COVID-19 has caused an increase in time spent gaming due to the changes in both our home and work lives. A PwC survey found that gaming hours have increased the most for social multiplayer games — even among the non-gaming community, as kids and adults socialize remotely. Most of the gaming population expects these habits to continue after the pandemic. As result, gaming has become one of the hottest sectors of 2020. Gaming allows individuals to be social while being protected in isolation.

As gaming attracts more eyeballs, we expect advertising dollars to shift to gaming, making it an attractive target for the major tech players. This sector has produced one of the largest public deals of the year with the Microsoft-ZeniMax acquisition, along with large deals by Take-Two, Zynga and Caesars Entertainment. However, with valuations at an all-time high in the sector, many private companies are foregoing the acquisition approach and are continuing to raise capital, leading to significant funding for companies such as Epic Games, Roblox, Niantic, Applovin, and many others.

SaaS: A K-shaped recovery

Unlike other recessions, the COVID-19 crisis is having widely diverging impacts on different sectors, giving rise to both “winners” and “losers” in a K-shaped recovery, in which the tech industry is not immune. The new way of being has derailed many company’s timelines, allowing major players to emerge stronger than their less-capitalized competitors, which is giving them the ability to grow through transformative acquisitions. We have seen evidence of this as SaaS was the most active part of tech deals in 2020.

Tech companies continue to expand their capabilities, differentiate themselves from their competitors and capitalize on the sector shifts emerging from COVID-19. Fastly’s acquisition of Signal Sciences, NetApp’s acquisition of Spot, and Autodesk’s acquisition of Pype and Spacemaker are great examples of how tech companies can continue to expand their base as the proliferation of data leads to new enterprise solutions. As the SaaS delivery model becomes the standard, it forces the hand of companies in other sectors that have outdated go-to-market strategies to convert to the SaaS delivery model — or to acquire companies that can give them that ability.

Venture into the future of capital

2020 has been a banner year for US-based VC-backed companies receiving historic amounts of funding, capped with Q3 recording $36.5 billion in investments. Q3 2020 was one of the highest quarters ever, second only to Q4 2018, which raised $40.5 billion. Investors have continued to consolidate capital into their most valuable and mature businesses, leading to a consistently high volume of VC mega deals. The explosion of this slice of the VC ecosystem has been one of the most drastic changes over the past 10 years and has ramped up throughout the COVID-19 pandemic.

One big reason behind the increase — despite the economic slowdown — is the involvement of nontraditional funds, including sovereign wealth funds, mutual funds and hedge funds. As the pandemic progressed, fund managers with established LP relationships and a record of strong fund performance have not experienced roadblocks when raising new funds. FinTech, Digital Health and AI have received the majority of investments over the past three quarters — involving companies like XtalPi, Zymergen and Affirm — as investors look toward the future value of key insights that artificial intelligence can bring in the health and payments sector. These funding trends will likely fuel more M&A activity in this space in the future.

Pandemic accelerates innovation

With history as a precedent, new disruptive business models will arise from the crisis. COVID-19 has turned into a once-in-a-lifetime event, which will have long-lasting impacts on all aspects of our lives, even after a vaccine is developed. The new normal, which is becoming more accepted, includes remote work and education, urbanization reversal, and at-home services and entertainment — trends that have become catalysts for virtual collaboration, streaming technology and autonomous vehicles. To cater to the needs of consumers and employees, virtual collaboration tools like Zoom, Slack and Google Meet, etc., have leap-frogged years of innovation in a short period of time.

With most outdoor facilities shut down, in-home streaming services have improved both their content and user experience dramatically. Finally, global financing for the autonomous driving industry has surpassed $7 billion for companies like Waymo, Zoox, Nuro, Cruise, Baidu, Didi, Pony.ai and AutoX, while Tesla continues to build upon its own driverless car technology. We expect the excitement around this technology to continue, involving large amounts of funding, high valuations and acquisitions as companies compete to stay ahead of the game and differentiate themselves.

Semiconductors are fully consolidating

Consolidation in the semiconductor sub-sector continued as companies try to build scale in order to stay competitive. Four of the largest mega deals in 2020 have been in the semi sub-sector, including Nvidia-ARM, AMD-Xilinx, Analog-Maxim and Marvell-Inphi. The mass consolidation is expected to continue as interest rates stay low, end markets and technologies change frequently, and stock prices — key currency for acquisitions — stay high.

Key trends driving consolidation are strategic diversification (e.g., 5G, infrastructure), growth focused on verticals (e.g., automotive) and portfolio pruning that leads to diversification of non-core assets (Intel’s NAND sale). Nvidia, Marvell and Analog Devices have emerged as the consolidators, as they continue closing mega deals. AMD has joined the fray with its $35B acquisition of Xilinx, which positions the company well against Intel. Given the overall low growth across the sector, companies are positioning themselves for growth through mid-to-high growth areas, which include 5G, data centers, cloud computing, industrial IoT and automotive — areas where we expect deal activity to continue in 2021.

Contact us

Todson Page

Partner, Deals, PwC US

Marc Suidan

Technology, Media and Telecommunications Deals Leader, PwC US

Sundar Ramamurthy

TMT Deals Principal, PwC US

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Technology deals insights: 2021 outlook

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2020 Technology deals insights

Technology deals outlook