A banner year for technology mergers and acquisitions – what’s behind this boom? | Allen & Overy LLP

In a year where the total value of global M&A deals exceeded $5 trillion, technology deals were the dominant driver of the market and in many jurisdictions.

Our data shows that technology deals topped $1 billion for the first time, 71% more than in 2020, accounting for nearly 20% of the global deal market by value and more than 22% by volume.

logo for data source company Data provided by Refinitiv. Figures represent transactions announced between January 1, 2021 and December 31, 2021.

In an extraordinary year, we’ve seen deals at every level of the market, from small start-ups bought for their IP to mega-deals, as well-funded, high-growth companies seek to expand into new markets, buying new technologies or recruiting new talent.

For example, DoorDash, the American online grocery delivery company, was among the growth companies making bold acquisitions when it struck a €7 billion deal to buy Finnish delivery company Wolt, to grow in a wide range of markets around the world.

Other deals include Etsy’s acquisition of vintage and used clothing app Depop for $1.6 billion, while Peloton invested in a traditional industry rather than a tech company, buying the maker of exercise equipment Precor, expanding its reach and manufacturing capacity.

These deals are part of a broader trend, with big tech companies making acquisitions at an accelerating pace in many markets.

Clearly, these companies, whose products and services have long been distributed worldwide, are now also global in their footprint. It is also an indication of growing confidence that we are experiencing a sustained trend, rather than a second dot.com bubble.

Although the creation of special purpose acquisition companies (SPACs) in the United States has dropped dramatically after 18 months of phenomenal growth, SPACs continue to energize and disrupt the technology M&A market as they are looking for companies to buy with the money they have raised.

More broadly, there is growing competition for assets as investors fear missing out on opportunities if they don’t act quickly.

Pandemic effect

This growth is partly explained by the pandemic effect, the crisis clearly proving that the digital economy is now at the heart of our lives and our interactions.

Consumer and user-facing technologies have become so standardized that it has driven deals and freed up record amounts of funding to invest in full-fledged M&As or collaborations. Last year, one of the most successful IPOs in Germany was that of Bike24, an online platform for bicycles and bicycle spare parts.

Environmentally and socially responsible technologies – such as smart energy grids and traffic control systems – are also attracting investors willing to deploy capital.

But less everyday technologies also score more than in recent years, as we’ve seen with growing activity around augmented and virtual reality technologies, like the Metaverse, and in quantum computing, where IonQ has chosen to s associated with a SPAC becomes the first purely quantum company listed on the stock exchange.

Diversified investors

Traditional companies are driving technology mergers and acquisitions as they seek to accelerate their own digital transformation. Sometimes this will be through simple acquisitions, but usually collaborations and ventures are the way to go, at least initially.

Buying stakes in tech start-ups allows traditional companies to test the waters, on a “try before you buy” basis. It’s a strategy vigorously pursued by a number of big names in finance across a range of platforms, from incubators and captive venture capital funds to more bespoke joint ventures with other market players.

Private equity firms remained big investors, particularly in the software sector, attracted by assets offering good profit margins and stable income streams or the ability to buy and build a portfolio of companies with interesting synergies. While they may still see the possibility of selling these assets forward, they seem willing to pay high multiples.

But an increasingly diverse array of investors, with huge amounts of capital to deploy, have also entered the market in force, including sovereign wealth funds, hedge and pension funds and investment banks.

Their presence has forced some traditional investors to up their game, invest larger sums than before and start taking a leading role in funding rounds, highlighting their industry experience as a key differentiator. For tech companies seeking investment, the amount of the check is only a concern; the relationship that accompanies it can be just as important.

A lasting boom?

Whether the tech M&A boom will continue remains to be seen.

There are a number of potential hurdles that could slow the extraordinary growth we’re seeing right now, including soaring valuations that tech companies are realizing.

Regulation could also chill the market, especially as tighter foreign direct investment controls and national security checks in a growing number of jurisdictions are disproportionately focused on tech assets.

Ongoing trade tensions between the United States and China, so often centered on key technologies like 5G and semiconductors, continue to disrupt the market to some degree.

But the underlying market fundamentals, including continued access to finance at affordable rates and the growing appetite for technology in the economy and society, remain very strong.

It may take a major shift in the global economy to end this period of explosive growth.

Wiley C. Thompson