Tech M&A in 2022 was a tale of two halves. The year started
off with a bang, with mega-deals such as Microsoft’s pending
$69 billion acquisition of Activision Blizzard, Elon Musk’s $44
billion acquisition of Twitter and Broadcom’s pending $61
billion acquisition of VMware inked in quick succession. However,
deal activity fizzled in the second half of 2022, as high
inflation, aggressive anti-inflation monetary policies,
geopolitical instability, assertive antitrust regulators and
tightening financing markets depressed target valuations, reduced
strategic acquirer confidence and sidelined private equity sponsor
buyers. Deal volumes dropped from $531.13 billion1
during the first half of 2022 to $189.17 billion in the second
half, resulting in total 2022 volume of $720.3 billion, a 36%
decrease from 2021’s record high of $1.1 trillion.2
Despite the downtrend, global tech M&A activity in 2022
remained strong relative to pre-pandemic levels and accounted for a
record 20% of all global M&A activity. As was the case in 2021,
software deals remained the strongest performer within the tech
sector, representing approximately 90% of tech M&A deals.
The numbers provide only a partial picture of the trends we saw
in 2022 and where tech M&A activity is headed in 2023.
Let’s take a closer look, with an eye toward what we can expect
to see in the coming year.
Take-private transactions take center stage
As we entered 2022, the ongoing correction in US public market
valuations in the formerly high-flying tech sector seemed to auger
a private equity tech take-private boom. Private equity sponsors,
loaded with record levels of dry powder and less burdened by the
antitrust challenges faced by strategic acquirers, were poised to
pounce on the most attractive entry valuations in years. As the
year went on, however, macroeconomic factors, particularly rapidly
rising financing costs and a significant deterioration in the
availability of committed acquisition financing, weighed down
activity. Still, in a year where global private equity M&A
volumes across sectors declined 36% from 2021,3 private
equity take-private transactions of US-listed tech companies
remained a bright spot, with 21 announced deals in 2022, flat from
2021 levels.4 As was the case in 2021, Thoma Bravo led
the pack, with six announced take-private deals of US-listed tech
companies in 2022 – three of which were in the identity and
access management category, to the interest of US antitrust
enforcers as discussed below – and Vista Equity Partners was
next in line with three announced transactions (including its
acquisition of Citrix Systems with Elliott Management’s private
equity arm).
Sponsors got creative with their financing structures to get
deals done. While direct lenders have historically struggled to
compete with the syndicated lending market on price and covenant
packages, as the year progressed, sponsors increasingly spurned the
syndicated lending market in favor of debt packages arranged solely
by direct lenders. Committed preferred equity also found its way
into a number of financing packages, particularly for larger deals
such as Citrix. Going further, rather than arranging upfront
committed debt financing, Thoma Bravo opted to fund the purchase
price for its announced $2.3 billion acquisition of ForgeRock
entirely with equity commitments that could be reduced prior to
closing with debt proceeds.
Some sponsors, while unable to present compelling take-private
proposals to targets, have deployed capital in private investments
in public equity (PIPEs) of public targets, marketing these
investments as both a vote of confidence for the incumbent board
and much-needed liquidity to help the target weather the downturn.
We’ve yet to see a significant uptick in sponsor-backed PIPEs
at tech companies, but it remains a trend to watch for in 2023,
particularly for newly public companies that are not generating
positive free cash flow or that need a white knight to help defend
them against activist attacks. Further, these investments may be a
toehold for future take-private transactions. Similarly, we expect
sponsors to actively pursue carve out opportunities – like
Francisco Partners’ carve out acquisition of the data and
analytics assets from IBM’s Watson Health business – in
2023 as tech giants streamline their portfolios to focus on their
core businesses.
Global regulators maintain assertive posture
The shadow of regulators loomed large over tech M&A activity
in 2022. Still, outside of mega-deals of more than $10 billion and
acquisitions by mega-cap tech, the shadow proved to be just that in
most cases – an ominous presence that had dealmakers on high
alert but ultimately did not prevent most announced deals from
getting done.
In the US, the Federal Trade Commission and the Department of
Justice under the Biden administration have shifted their
priorities and rhetoric in favor of tougher enforcement, with
consolidation in the tech sector being one of their top targets.
These changes have included increases in the agencies’:
- Willingness to challenge vertical mergers (e.g., the FTC’s
December 2022 challenge to Microsoft’s proposed acquisition of
Activision Blizzard). - Focus on acquisitions of nascent and adjacent competitors,
particularly by large and mega-cap tech, such as Meta/Giphy, which
was blocked by the UK’s Competition and Markets Authority (CMA)
after the transaction closed; Meta/Within, which is currently being
challenged by the FTC and the CMA; and Amazon/iRobot and
Broadcom/VMware, which are each responding to second requests. - Focus on new potential theories of harm, such as the impact of
mergers on labor markets. - Distrust of divestiture offers.
- Willingness to litigate and risk losing.
- Focus on private equity sponsor roll-ups (e.g., the second
request in Thoma Bravo’s acquisition of ForgeRock after Thoma
Bravo’s two earlier 2022 acquisitions in the identity access
management sector).
Even though most announced deals are still getting done, ex-US
merger control and foreign direct investment review continues to
extend or complicate deal timelines, particularly in jurisdictions
such as China, with acquisitions of critical technology in
particular under the microscope. To date, the FTC and the DOJ have publicly
challenged 22 mergers since President Joe Biden took office in
January 2021, more than double the level of activity of former
President Donald Trump’s first two years in office. Fifteen of
those challenged deals ultimately were abandoned, while others
remain pending. Still, the regulators at times face an uphill
battle convincing courts to adopt new theories of competitive harm
– in 2022, the agencies lost four cases seeking to enjoin
mergers at trial (all outside the tech space) and have largely
failed to win most nontraditional cases (e.g., challenges to
vertical mergers and nascent competitor acquisitions). Even so, the
threat of litigation alone undoubtedly deters some buyers from
pursuing acquisitions in the current climate.
Regulators’ losses in litigation may help build a case that
regulatory or legislative change is necessary to achieve
pro-competitive policy goals. Regulatory reforms that have been
introduced in past US Congresses and abroad already seek to arm
regulatory agencies with further ammo to block M&A activity.
For example, proposed legislation has been introduced in the US
that would expand the transactions subject to antitrust review or
create presumptions against certain types of mergers. The European
Union’s Digital Markets Act, which took effect in November
2022, similarly increases the types of tech-related transactions
that would require notification to the EU’s competition
commission, regardless of deal size.
Looking forward, we should expect even more enforcement as the
agencies continue to execute the Biden administration’s mandate
for increased enforcement and receive additional funding for that
mission. In December 2022, Congress made good on its promise to
increase resources for the FTC and the DOJ by changing the
Hart-Scott-Rodino (HSR) filing fee structure in a way that
substantially increases the fee for the largest transactions. The
changes, which are expected to be implemented in 2023, are estimated to increase HSR filing
fees approximately 800% – from $280,000 to $2.25 million
– for transactions valued at more than $5 billion and will be
adjusted for smaller transactions.
Tech remains in activist crosshairs
Shareholder activists capitalized on the plunge in tech
valuations in 2022 to launch new campaigns, with campaigns at tech
companies representing 27% of all public US activism campaigns, the highest of any sector and a
multiyear high.
M&A-related campaigns remain a favored tool for tech-focused
activists. Continuing a 2021 trend, the first half of the year saw
a number of high-profile “sell-the-company” campaigns,
including at Anaplan, Peloton, Everbridge and Zendesk. Despite the
mixed success of these campaigns, their prevalence has led public
company boards to focus on activist preparedness
–particularly as private equity sponsors increasingly team up
with, or quickly follow, activists advocating for a sale. Momentum
for these campaigns slowed dramatically in the second half of 2022
as many would-be acquirers were sidelined by the macro factors
discussed above. The second half of the year instead saw activists
pivot to capital allocation and operational improvement campaigns,
highlighted by the cost cutting and capital return campaigns
launched at Meta and Alphabet in the fourth quarter. Throughout the
year, incumbent shareholders actively resisted sponsor take-private
transactions perceived to be undertaken at depressed valuations or
without robust sale processes. Similarly, as tech dealmakers
explore mergers of equals or other stock-for-stock transactions to
bridge valuation and financing gaps caused by the macro
environment, they will need to contend with incumbent shareholders
and activists who have been quick to wage
“scuttle-the-deal” campaigns against stock-for-stock
transactions perceived to lack a compelling strategic rationale, as
Zendesk found out the hard way in its abandoned acquisition of
Momentive.
In addition to market forces, regulatory change is expected to
spur activist activity in 2023. The Securities and Exchange
Commission’s universal proxy rules are now in effect, making it
easier for shareholders to “mix-and-match” individual
directors rather than having to choose a full slate. The rules are
expected to increase the frequency of proxy contests (particularly
by less-established activists), afford dissidents increased
leverage in settlement negotiations, and increase focus on the
strength and qualifications of individual directors. These
developments may ratchet up the pressure on target boards to
dismantle structural governance protections, modify their capital
allocation policies or pursue divestitures of non-core
businesses.
Newly public tech companies (particularly companies that went
public via deSPAC transactions) may find themselves particularly in
the crosshairs, given that they as a whole dramatically
underperformed the broader market in 2022. While these
less-established companies tend to have strong defensive profiles
– including classified boards, dual-class share structures
and/or large pre-initial public offering shareholder blocs –
they may face increased activist pressure to go private or change
board/management composition or their capital allocation policies
if they are unable to convey credible stand-alone strategies for
navigating the challenging macro environment.
Convergence of tech and healthcare drives digital health
deals
As discussed in our
2022 Life Sciences M&A Year in Review blog post, decreased
valuations and challenging capital markets also impacted healthcare
companies last year, and digital health companies – health
companies that build and sell technology – were no exception.
Faced with depressed venture funding activity (which for digital
health declined nearly 50% from 2021),
an uncertain IPO market and pressure to provide liquidity to
investors, M&A offered digital health startups a solution to
deliver liquidity, streamline costs and bridge funding gaps as they
continue to develop their products. In some instances, tech buyers
looking to disrupt the healthcare space capitalized on the tight
market conditions in some of the biggest deals of 2022, such as
Amazon’s pending acquisition of One Medical and Microsoft’s
acquisition of Nuance. In other cases, digital health companies
used M&A to build scale in a crowded market, whether with an
inorganic growth strategy, such as Monument’s acquisition of
Tempest (both companies in the alcohol-use sector), or with a
“buy-and-build” strategy, such as CVS Health’s
purchase of Signify Health.
While deal activity in digital health was down in 2022 –
like in all of tech M&A – there was a notable uptick
beginning in Q3, and we would expect this momentum to continue in
2023. One of the impacts of COVID-19 was increased innovation in
healthcare through technology, and many established players are
looking toward an acquisition strategy to adapt to the new normal
as early-stage digital health companies continue to face
headwinds.
Mergers of equals as the new SPACs?
Another interesting, albeit somewhat subtle, trend that emerged
in 2022 was an uptick in mergers of equals among VC-backed private
tech companies. These transactions are typically structured as
stock-for-stock combinations between similarly valued companies at
a low or no premium. As result, mergers of equals preserve and
combine the preference structure of each of the constituent
parties, and they provide each party with significant participation
in the combined enterprise through representation on the combined
company board of directors and management team or other bespoke
post-closing governance arrangements.
Historically, mergers of equals among private companies have
been somewhat rare because they require parties to agree on value
and governance matters, and a horizontal combination of competitive
businesses may pose a greater antitrust risk. In 2022, however,
IPOs or cash sales were not viable exit opportunities for many
investors – particularly investors of underperforming or
cash-burning investments. Mergers of equals can be an attractive
alternative for investors unable to find a viable cash buyer or
path to the public markets, as combining two companies with the
same or complementary product offerings can yield significant
strategic benefits and cost synergies. These transactions, if
structured appropriately, also can result in beneficial,
tax-deferred treatment for the shareholders of the ostensible
selling entity.
LOOKING AHEAD TO 2023
This year could bring an uptick in deal volumes from the
doldrums of the second half of 2022, as boards and investors find
their footing in the “new normal” environment. A return
to the go-go tech M&A market of 2021, however, is unlikely, as
the macroeconomic, regulatory, and financing environment continues
to weigh on dealmaker confidence and capacity. Instead, we expect
creative structuring and bespoke transactions to carry the day,
along with a healthy dose of sponsor take-private activity.
Activists will continue to target companies that fail to adapt
(with more capital allocation and board/management regime change
campaigns to come, enabled by universal proxies), while
take-private sponsors and other acquirers of publicly traded US
targets will need to consider the application of the new 1% excise tax on certain
stock repurchases (including certain leveraged buyouts) that is
now in effect. If financing markets remain weak and cash exit
valuations remain depressed, we may see private company mergers of
equals or similar stock-for-stock transactions become an
increasingly important tool for VC-backed tech companies and their
investors in 2023. One thing is for certain – we’ll have
lots to talk about this time next year.
Footnotes
1. Global Mergers & Acquisitions Review – First
Half 2022 – Refinitiv
2. Global Mergers & Acquisitions Review – Full
Year 2022 – Refinitiv
3. Id.
4. Deal Point Data; Cooley analysis.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
