Investors invigorated by the digital transformation of cybersecurity and artificial intelligence (AI) technologies prepare for an M&A rebound in 2024

SAN FRANCISCO, Nov. 2, 2023 /PRNewswire-PRWeb/ — Morrison Foerster, a leading global law firm, today announced the results of its annual Tech M&A Survey, which reveals that dealmakers anticipate a potential rebound in M&A activity as they look to 2024. While global telecommunications, media, and technology (TMT) M&A transactions dropped by 63% in value terms and 32% by volume in H1 2023 compared to the same period in 2022, TMT deals continued to account for a very sizeable share of global M&A, representing almost a quarter of all M&A transactions globally and demonstrating the adoption of digital transformation and data analytics in every sector. The new Morrison Foerster survey report, “Directing Disruption: AI and Cybersecurity Underline Tech Sector’s Flair for Self-Renewal,” conducted in conjunction with Mergermarket, also reveals that challenging dealmaking and macroeconomic factors led to tech M&A strategies shifting to securing working capital and focusing on liquidity; adopting alternative deal structures or minority investments; and completing strategic middle market deals to increase competitiveness.

“This year’s Tech M&A survey reflects views influenced by a choppy global technology M&A market that has been impacted by the realities of challenging financial trends,” noted Brandon Parris, partner and co-chair of Morrison Foerster’s global M&A practice. “But as we look to 2024, despite macroeconomic uncertainties, there is much to be encouraged about, especially with the rise of generative AI and the renewed focus on cybersecurity innovation. We expect these and other technology areas to have a massive impact on global deal activity in the years to come.”

“Tech M&A deals will continue to be the go-to strategy for companies looking to scale and increase competitiveness,” added Spencer Klein, partner and co-chair of Morrison Foerster’s global M&A practice. “But to get deals done, both PE and corporate investors will continue to rely on smaller strategic deals and alternative deal structures as part of their M&A strategy while facing less predictable externalities like financing costs and antitrust concerns.”

Survey Highlights

• Almost half (48%) of respondents forecast an increase in tech M&A deal volumes over the next 12 months. Private equity (PE) firms were more optimistic than corporate respondents (58% vs. 38%), reflecting a divergence of available capital, market volatility, and increased regulatory scrutiny of M&A deals for strategic acquirers.
• More than half of survey respondents (51%) expected the average tech M&A deal value to increase in the next 12 months, with corporates more optimistic (53%) than PE firms (48%).
• New tech subsectors also emerged as targets for future tech M&A transactions in the 2023 survey: cybersecurity (25% of first-choice votes), AI/machine learning (18%), and enterprise/logistics software (16%). Last year’s top three subsectors (first-choice votes) were AI/machine learning (22%), e-commerce (13%), and robotic process automation (13%).
• Investors are looking to spread their investment risk with minority investments and other alternative deal structures like joint ventures and contingent consideration. Almost all PE firms surveyed (91%) expected to make use of minority investments in their tech M&A plans over the next 12 months, up from 62% in 2022. Sixty-one percent of corporate respondents will use minority investments as an M&A strategy.
• The primary driver of respondents’ tech M&A strategies remains consistent with last year’s survey: scaling up to increase competitiveness (17% of first-place votes, the largest such share and 44% of top-three votes overall) and keeping up to speed with technological advancements (51% of top-three votes). Meanwhile, the continuing high cost of financing emerges as a key factor in this year’s survey. A notable secondary M&A driver is securing working capital and focusing on liquidity, which accounts for 19% of second-place votes, the largest share among secondary drivers.
• Environmental, social, and governance (ESG) considerations continue to increase in importance in tech M&A targets and strategies compared to last year’s report. Respondents gave a score of 7.85 out of 10 for ESG’s significance in choosing the target of their most recent tech M&A deal, with the significance rising to 8.45 for the selection of their next tech M&A target.

Smaller Tech M&A Deals

Despite the downturn in tech M&A deal value and volume, all PE firms responding to the survey reported that they completed at least two tech M&A deals in the prior 12 months, including 68% that completed four or more transactions. Dealmaking in 2023 reflects a higher number of smaller domestic deals in all regions, as PE and corporate acquirers look to scale up to accelerate growth and innovation to remain competitive. Among corporates, only 14% completed four or more transactions, while 63% completed at least two over that period. In our previous survey, 60% of corporates reported undertaking two or more deals. This divergence in deal activity can be explained by structural, business, and funding differences between PE firms and corporates.

Preference for Early-Stage Companies

With digital transformation turbocharging generative AI, robotics, and data analytics this year, investors are incorporating these specific technologies into their M&A strategies to achieve market advantages and the highest returns, despite ongoing macroeconomic and geopolitical headwinds. Survey respondents continue to target younger tech companies with these capabilities. In this year’s survey, only 14% of respondents said they primarily target mature companies (those operating for five years or longer), essentially unchanged from 15% last year. Forty percent of respondents primarily target startups (companies operating for less than two years), and almost half of respondents (46%) say they primarily target companies that have been operating for two to five years.

ESG Standards for Mainstream Deals

ESG considerations in assessing M&A targets have only grown over the years. Across all markets, there has been a notable increase in the importance of ESG considerations when choosing tech M&A targets. This year there was a 15% increase in response to the question of ESG’s significance in picking the most recent target from 6.7 out of 10 in last year’s survey to 7.85 in the 2023 survey. The new ESG disclosure and compliance requirements are cropping up globally in parallel to the increased attention from tech M&A dealmakers. New climate disclosures from California and the European Union, both hotbeds of tech M&A activity, will keep ESG at the forefront of tech M&A dealmakers’ considerations for the foreseeable future.

Regulatory Scrutiny for Tech M&A Deals

The tech sector’s reach into all aspects of business and personal life has attracted regulatory scrutiny, especially as it relates to antitrust, consumer data protection, and privacy. The vast majority of respondents (81%) expect antitrust regulation of tech M&A to become either somewhat or significantly stricter over the next three years. Over a fifth of PE respondents (22%) are anticipating this increased scrutiny by identifying different industries or tech subsectors. Among corporates, tighter antitrust scrutiny would especially deter their organizations from seeking targets with a close connection to data privacy issues and/or the use of consumers’ personal data that they might have otherwise pursued (21%).

To download the full survey results with additional insights, visit: https://www.mofo.com/tech-ma-forecast.

Methodology

In Q2 2023, Mergermarket surveyed 300 dealmakers from around the world to gain insights into the future of technology related M&A. Respondents were equally distributed among corporates with a minimum of $250 million in annual revenue and private equity firms with a minimum of $500 million in assets under management. With respect to geography, 30% of respondents were based in North America, 30% in Europe, 30% in the Asia-Pacific region, and 10% in Latin America. All responses are anonymous, and results are presented in the aggregate.

About Morrison Foerster

Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. 2023 marks the 40th anniversary of Morrison Foerster’s presence in Asia. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been named to The American Lawyer’s A-List for 20 of the ranking’s 21 years. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of having at least 30%women, minority, LGBTQ+, and lawyers with disabilities representation across notable leadership roles and within partnership. In addition, the firm was selected as the “Outstanding Firm for Diversity & Inclusion” as part of the Chambers Diversity & Inclusion Awards: USA 2023. Morrison Foerster also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment. For more information, visit http://www.mofo.com.

Media Contact

Ming Lacey, Morrison Foerster, +1-917-340-7251, mlacey@mofo.com, www.mofo.com

View original content:https://www.prweb.com/releases/mofo-survey-tech-ma-poised-for-upswing-disruption-and-competition-sharpen-focus-for-dealmakers-301975742.html

SOURCE Morrison Foerster