What Would an Economic Downturn Mean for Technology M&A Activity, and How Should Buyers and Sellers Get … – Foley & Lardner LLP

Starting with a sell-off in public technology stocks (trading “FAMMGA” is no longer a winning strategy), the outbreak of war in Europe, upcoming midterm elections in the US, out of control inflation, rapidly rising interest rates, rotating COVID19 shut-downs in China rippling through the supply chain, escalating prices at the pump, threats of war in the Taiwan straits, and increasing regulation by enforcement, all while the world has otherwise seen a return to “in real life” activity after two years with minimal in-person events, have had sweeping effects from the gas station to the grocery store to capital markets to technology M&A activity.
We have previously examined how 2022’s volatile events have negatively impacted technology startup valuations and venture capital investment, but how is this impacting tech M&A activity? Common sense would tell us that with falling tech valuations, tech acquisitions would be on the rise. But is that actually the case?
A recent analysis by Jahani & Associates took a deep dive into the impact of the economic downturn on M&A and whether it has actually led to a spike in activity. What they found was significant growth in global M&A transactions in terms of capital deployed in the first half of this year – a 67% increase over the same time last year (from $1.14 trillion to $1.91 trillion). They point out that we don’t yet understand the full effects of a recession (it is generally accepted that the US has only officially been in a recession since summer 2022), but their data shows firms have been taking advantage of those lower valuations and utilizing 2021 profits to make acquisitions.
Below are some of the additional highlights from their report:
Looking more carefully at M&A activity in the tech sector, however, tells a different story.  According to data taken from S&P Capital IQ, Pitchbook and MergerMarket, overall tech M&A activity was down by more than 40% at approximately $450 million in the nine months ended September 30, 2022.  And this despite some blockbuster transactions like Adobe’s $20 billion acquisition of FIGMA and some major private equity buys.
But there are reasons for optimism as we look into the post-election cycle:
We are already seeing sellers offering seller financing to buyers to hold the line on valuation in the face of a clearly higher cost of capital in the capital markets.  We expect private equity buyers to increase their use of liquidation preferences at multiples greater than 1 times, participation rights, pay-in-kind dividends and forced redemption clauses to bridge valuation and risk gaps.  We are seeing more earnout and deferred payment structures to protect capital invested but also expected return on capital invested.
The impact of hot war, cold war, geopolitical instability, another pandemic outbreak, or natural disaster can never be predicted, but there is reason to be optimistic.  To get ready for a running start in 2023, we expect that buyers and sellers will put their best feet forward by:
From a legal perspective, some of this prep work should include a detailed look at your company’s revenue and commercial agreements:
All of this requires a strategy, proper planning and forward-thinking, proactive advisors who are all in.
No one can predict the lasting effects of an economic downturn for certain and whether tech M&A activity will ebb or flow.  We continue to see economic conditions evolving daily. However, current economic conditions present the ideal buyer’s M&A market.  So, looking into 2023, we could continue to see an increased appetite for acquisitions as valuations stabilize at lower levels, inflation subsides and interest rates taper off.
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