Technology companies look set to benefit as new innovations come on the market and private equity companies compete with corporate acquirers for business. Research carried out by law firm Morrison & Foerster in association with 451 Research's M&A KnowledgeBase reveals a buoyant outlook for technology M&A with valuations looking set to hold steady while activity increases. Slightly more than half of survey respondents (51 per cent) expect deal flow to increase over the next year when compared to the previous year, while only 19 per cent anticipate a slowdown. Forty-five per cent of respondents forecast that private company M&A valuations will remain steady, with 31 per cent anticipating a decrease in pricing.

Bullish forecast

'It is encouraging to see such a bullish forecast, particularly following Q3 closing with a higher aggregate value of deals than the previous quarter,' said Robert Townsend, co-chair of Morrison & Foerster’s global M&A practice group. 'A significant percentage of dealmakers clearly expect tech M&A to have a strong and sustainable growth trajectory buoyed by new innovations and a healthy outlook for private equity spending.'

Postive despite decline in global tech and telecoms

The positive sentiment comes despite a decline in the total number of global tech and telecom deals over the first three quarters of the year, when compared to the same time periods in the previous two years, according to 451 Research’s M&A KnowledgeBase. The drop in deal volume is mostly attributable to less shopping by corporate acquirers, which respondents indicate are facing high valuations and finding fewer suitable targets.

Private equity spending to increase

The majority of respondents (59 per cent) forecast an increase in private equity (PE) activity and a similar number (53 per cent) expect PE firms to be more competitive with corporate acquirers over the next 12 months. According to 451 Research’s M&A KnowledgeBase, 2017 marks the first year in history that PE firms have announced more tech acquisitions than the public companies who typically dominate the sector.

Non-traditional companies

PE firms have accelerated their activity by broadening the range of companies they target. Nearly three-quarters (72 per cent) of respondents said the increase in deals in recent years has been strongly influenced by PE firms going after “non-traditional” companies, which may include smaller startups. This is expected to continue, with 74 per cent of dealmakers forecasting an increase over the next two years in the number of PE acquisitions of growth companies, as opposed to the mature businesses buyout firms have previously preferred. 

Acquirers prioritise strong cybersecurity policies

A vast majority of dealmakers (82 per cent) report that during their due diligence processes, acquirers are putting increased emphasis on the cybersecurity standards and practices of target companies. Only one per cent of dealmakers said they are giving it less attention. 

Cross-border transactions shift under new policies

Revised trade policies and priorities coming out of the Trump administration as well as recent indications that CFIUS may be more willing to intercede in M&A are impacting the flow of cross-border transactions, according to dealmakers. Seventy-one per cent of respondents ranked CFIUS as a factor contributing to a slowing of deal volume and value between China and North America and half of respondents indicated that China’s regulatory approval process exerted similar downward pressure. Looking forward, 51 per cent of dealmakers anticipate that US trade policies will lead to an increase in Chinese acquisitions in countries other than the US and 24 per cent anticipate no effect. That said, Chinese investors remain strongly interested in US tech companies due to the quality of the targets and better valuation than domestic targets, according to Chuan Sun, a partner in Morrison & Foerster’s China Outbound Group. 'While CFIUS is certainly of concern to Chinese investors, many of them are still actively looking for investment opportunities involving US tech targets in their pursuit of a strong technology edge, particularly in less sensitive areas.'

Emerging technologies drive deals

With the growing promise that multiple new technologies will have a transformative impact across a range of industries, dealmakers expect that businesses focused on these areas will be hugely attractive to investors. A significant number (88 per cent) of respondents believe that machine learning and Artificial Intelligence (AI) will be a strong driver of M&A over the next three years. This compares to 67 per cent of respondents who project that the Internet of Things will be a strong driver during the next three years and 39 per cent who expect the same from Blockchain.

Methodology

The survey was conducted in September 2017 and had over 140 participants, primarily corporate or M&A executives and investment bankers with the remaining responses coming from lawyers, VCs, PE professionals, and others in the M&A community. Roughly three out of four responses came from dealmakers and advisers based in the US. Silicon Valley represented the largest single location, accounting for 35 per cent of the total, followed by China, which accounted for 10 per cent of respondents.