Morrison Foerster has announced the results of its annual Tech M&A Survey, which reveals dealmakers are cautiously optimistic about 2023 and view 2022 as a year of reset. Through the first three quarters of 2022, tech, media, and telecom (TMT) deals announced worldwide were worth a combined $887.4 billion, which is behind 2021’s historic run but well ahead of 2020 and the years preceding.

The new Morrison Foerster survey report, Cutting Edge: Tech M&A Is Powering Deal Markets, in conjunction with Mergermarket, also shows that the top driver for tech M&A deals over the next 12 months will be keeping pace with technological advances, mitigating risk through joint venture and club deals, and addressing concerns around antitrust, ESG, and shareholder activism.

“I’m emboldened by the results of this year’s Morrison Foerster/Mergermarket Tech M&A Survey,” said Brandon Parris, co-chair of Morrison Foerster’s global M&A Group. “Despite market volatility, global dealmakers continue to prioritise technology acquisitions, especially in heated sectors like artificial intelligence and machine learning. While deal numbers for 2022 were never going to reach the historical peaks of 2021, deal activity remains steady, and dealmakers are cautiously optimistic for the future.”

Survey Highlights

• Globally, 76% of respondents expect aggregate tech M&A deal volumes to increase in 2023, while 82% expect average values to increase in the same period.

• Investors anticipate seeing a rebound in dealmaking in 2023, with 50% of private equity (PE) respondents signalling that they expect to complete more than four tech M&A deals compared to 30% in last year’s survey. Similarly, 43% of corporate respondents said they anticipate completing at least one deal in 2023, compared to 30% last year.

• The key driver of respondents’ tech M&A strategy will be keeping pace with advances in the technology landscape, with all regions and both corporates and PE firms identifying this as the most important factor for their organisation.

• Artificial intelligence/machine learning (AI/ML) is cited as the first-choice subsector for the best deal making opportunities in 2023 by a wide margin of respondents (22%).

• Top trends in technology include industry consolidation, the tightening of the global regulatory environment, and the rise of industry disruptors.

Market-driven challenges outpaced regulatory challenges as dealmakers cited widening valuation gaps, market volatility, and increasing competition for assets as the greatest hurdles to tech M&A over the next 12 months. The survey also shows that future tech M&A deals will be subject to greater regulatory, shareholder, and investor scrutiny. In addition, ESG considerations are expected to have more prominence for investors across all regions. Lastly, a majority of respondents are focused on stricter antitrust scrutiny as a concern over the next three years.

Respondents Turn to Both New and Proven Tech for M&A Targets

When asked about the types of technology that offer the best opportunities for dealmaking over the next 12 months, respondents selected innovative technologies with a wide variety of applications from B2B to consumer. Artificial intelligence/machine learning received the most responses, with 22% of dealmakers giving it the top rank. As AI/ML is both established and continuing to evolve, dealmakers are seemingly more comfortable investing in cutting-edge technologies as their end-use potential develops into a clearer solution. The next two sub sectors with the highest overall ranking are e-commerce and robotics process automation. These are a continuation of investments in B2B technologies, as cloud computing received the top ranking last year.

Private Equity Continues to Make Its Mark

Private equity’s enthusiasm for technology investments is expected to continue through 2023. PE firms have been active in the technology sector this year, with every PE survey respondent reporting that they have completed at least two tech M&A deals in the past 12 months, and half of these (49%) have completed four or more deals.

Shifting Investor Preference for Early-Stage Startups

Last year, respondents across all segments were focused on high-growth tech companies operating for two to five years as the top M&A target. This year, however, given the volatility in the public markets and its effect on the IPO market, these larger, pre-IPO companies were less attractive to respondents. Some 42% of PE firms and 55% of corporates indicated a preference for startups that were less than two years old. Companies at this funding stage have a longer runway for any potential exit and are more resilient to current market volatility.

Mitigating Investment Risk Factors

Macroeconomic forces can be hard to avoid, and this year’s survey shows that investors are looking for safe harbours from such forces. Both PE firms and corporates rank their own region as offering the best opportunity for tech M&A in 2023.

Additionally, the appeal of minority ownership structures continued to grow. While special purpose acquisition companies (SPACs) appear to have fallen out of favour globally, joint ventures (JVs) for corporates and club deals for private equity continue to appeal to investors who want to diversify their investment risk. Corporates are most enthusiastic about JVs (44%), minority investments (23%), and earnouts (23%), while PE firms are turning to club deals (25%) and convertible debt instruments (16%).

Methodology

In Q2 2022, 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 (PE) firms with a minimum of $500 million in assets under management. In respect of geography, 30% of respondents were based in North America, 30% in Europe, 30% in Asia-Pacific (APAC), and 10% in Latin America. All responses are anonymous, and results are presented in aggregate.