Global | Publication | May 2024
After a lacklustre finish to 2022 when compared to the vintage year for M&A that was 2021, dealmakers expected 2023 to see the market continue to cool in most sectors, in response to the economic headwinds of rising inflation (with its corresponding impact on financing costs), declining market valuations, tightening regulatory scrutiny and increasing geopolitical tensions. Hopes remained high, however, for deal activity in the perennially active TMT sector, which was expected to capitalise on the ever-increasing digitalisation and connectivity requirements of businesses and consumers alike.
In this article, we look back at the major trends and factors that influenced TMT M&A during 2023, and ahead to potential opportunities in 2024.
Globally, the market broadly met expectations; aggregate deal volume across all sectors in the first six months of 2023 did not significantly diverge from that in the last two quarters of 2022, before dropping significantly in many jurisdictions during the latter half of the year. These fluctuations in volume accompanied a “bottoming-out” and subsequent uptick in aggregate deal value across all sectors following the decline in 2022.
2023 opened with smaller, more mid-market deals, tied to the unavoidable reality of the higher costs and reduced availability of debt financing, which particularly impacted private equity firms that had benefitted from previously low interest rates (globally, private equity deal activity declined by 40% when compared to 2022). Private equity firms sought to counter this lack of debt financing by increasing their equity stakes, leading to an all-time high of average equity contribution per buy-out transaction in 2023. Global conflict, increased antitrust scrutiny of certain sectors and a valuation gap between buyers and sellers further depressed the market as the year went on. However, reduced valuations make for attractive targets, and this may go some way to explaining the increase in aggregate deal value towards the end of 2023. When surveyed, leading senior executives from multinational corporates, large private equity firms and major investment banks across the globe anticipated that the appetite for M&A in 2024 would recover, when compared to 2023.
As expected, the TMT sector was the best performer globally, both in terms of the number of deals in 2023 and aggregate deal value. However, the sector was impacted by the same challenges experienced by the wider M&A market, with the result that both volume and aggregate value of TMT deals were notably lower than in 2022. Technology deals accounted for the vast majority of M&A in the TMT sector, highlighting the continuing drive for businesses to maintain their competitive edge in this space. This focus on technology transactions was highlighted in our Global M&A Trends & Risks report for 2024, in which a third of respondents said they were looking to acquire an artificial intelligence (AI) product or business.
Software deals accounted for almost 75% of technology deal volume, which was broadly on a par with 2022, and two thirds of aggregate technology deal value, which represented a decline from 2022 (when almost three quarters of technology deal value related to software deals). That is not to suggest that software deals are not happening; software remains an active sector, with transactions including the just completed acquisition of security analytics provider, Splunk, by Cisco Systems for approximately $28bn.
M&A in the Americas saw a slide in aggregate deal volume across all sectors over the course of 2023, despite an uptick in aggregate deal values at year end (the final upward drive in aggregate deal values being primarily attributable to two significant acquisitions in the energy sector). All sectors in the United States faced increased antitrust scrutiny by the Federal Trade Commission and the US Department of Justice, which gave pause to both corporates and private equity firms alike who may otherwise have considered large acquisitions during 2023. As noted in the global context, private equity activity was further suppressed as a result of increasing interest rates for debt financing, which impacted their leveraged finance models.
Securing M&A-related financing in the US is expected to become more difficult in 2024, suggesting that complex financing structures may continue to be required at least in the short- to mid-term, and that the private equity funds may keep their powder dry until monetary policy in the US relaxes. The same respondents highlighted the stricter regulatory environment as being one of the top obstacles to completing M&A deals in the US and Canada in 2024, with concerns over tightened antitrust and foreign investment regulation representing at least part of the reason for the decline in the number of megadeals in this region.
TMT delivered a disappointing performance overall when compared to previous years, with 3,440 deals in 2023 (making up 25.8% of total M&A volume in the region, but representing a 30.8% drop in deal volume year-on-year) and total aggregate deal value of $323.7bn (18.6% of total deal value in the Americas). This represented a staggering 51.9% fall when compared to 2022 and meant that TMT was overtaken by energy, mining and utilities when it came to sector rankings for value, despite maintaining the highest volume of deals overall. Technology activity saw the Splunk acquisition make headlines, reflecting cybersecurity’s key position in business continuity as companies seek to address exploitation vulnerabilities in their systems.
The acquisition of Qualtrics International Inc. (a software company which utilises machine learning in its products) by Silver Lake Group LLC and the Canada Pension Plan Investment Board was consistent with the importance of AI noted in the Global M&A Trends & Risks report (and particularly, generative AI). As a sector-agnostic driver of efficiencies, generative AI is expected to be a key facet of M&A activity well into 2024 and beyond. This aligns with the expectations of our survey respondents, who expect M&A across all sectors to increase in the US and Canada when compared to 2023, with new products/services and the pursuit of digital transformation being the most significant factors.
When compared to the Americas, EMEA experienced a relatively successful 2023 for all sectors. Deal volume in the first half of the year surpassed that seen in the last six months of 2022, but did drop off in the final two quarters resulting in deal volumes for 2023 being 9.8% lower than in 2022. Aggregate value trended upwards through the year but still came in 25.7% lower year-on-year, reflecting the importance of the mid-market for dealmakers in Europe.
Europe was a popular destination for US dealmakers seeking to take advantage of the strong dollar. US acquirers accounted for €167bn of all-sector M&A deal value across EMEA, making them the top participants by value and averaging €104.6m per deal done in the region. Our survey suggests these foreign exchange benefits would not, however, be the main driver for 2024 M&A in EMEA. Instead, industry consolidation, the disposal of “non-core” businesses, and distressed opportunities were the focus of those surveyed. In relation to M&A in the Middle East and Africa, those surveyed expressed concern that foreign direct investment regulations may suppress activity in 2024, suggesting a continuing focus on Europe.
TMT took first place for both deal volume (3,629 deals, 22.6% of total deals) and aggregate value (total deal value of €176.8bn, 21.7% of total deal value across all sectors) in the region, but failed to reach the levels of 2022, coming in at 21.3% down year-on-year for aggregate deal value and 18.3% down year-on-year for volume. The largest TMT subsector in EMEA was the telecoms industry with a few digital infrastructure megadeals.
While technology did not produce as many blockbuster deals as in recent years (though 2023 did see the acquisition of online classifieds company, Adevinta, by a consortium of private equity houses for €14bn), the future for technology deal making in Europe may be brighter than it first appears when one considers the number of first-time and repeat startup founders starting new companies in Europe each year – it is notable that Europe has outpaced the US in start-up formation for the past five years. This suggests that Europe may prove to be a fertile ground for M&A in the future as these new companies mature – there were at least eleven rounds of >$100m being raised by AI companies in Europe in 2023 alone. Generative AI was a focus for strategic investments, and for multinational software company SAP it was the impetus for investments into Aleph Alpha GmbH, Anthropic PBC and Cohere Inc. in 2023. Moving into 2024, the strong market dynamics which see investors capitalising on the rapid pace of evolving technologies will continue to push industries to innovate in order to remain competitive. Business models such as software-as-a-service are expected to be a key facilitator in the adoption of technologies which are experiencing such a revolution.
The APAC region saw a softening of M&A activity during 2023 across all sectors, in part reflecting the slow recovery of China following the pandemic and its ongoing difficulties in the real estate sector. Volumes and values across all sectors broadly followed the trend seen in EMEA – a gradual downward slide in volume of deals over the year followed by an increase at the end of Q4, and a rebound of deal values in the second half of the year. 9,822 deals were announced in 2023, a 10.1% fall from 2022. Aggregated deal value of $807bn represented a 19.9% decrease year-on-year. As in other geographies, the high cost of financing reduced appetite for top-shelf acquisitions and created focus on the mid-market.
The TMT sector saw the highest deal volume in the region, accounting for 26.6% of all deals over the course of 2023, with 2,610 transactions (a decline of 22% year-on-year). However, in terms of deal value, the TMT sector (which saw a total deal value of $144bn over the course of 2023, representing a drop of 26% when compared to 2022) was the second most active sector, behind China’s significant industrials & chemicals sector (which saw total deal value of $177.9bn in 2023). APAC is poised for a surge in incoming TMT deals in the not-too-distant future, with M&A activity in South & Southeast Asia expected to increase significantly as a result of investments from Chinese enterprises into these regions, which are anticipated to increase during 2024 as China focuses more on opportunities in the technology sector. Respondents to our 2024 M&A survey anticipate that the drivers for this increase will include the pursuit of new products and services, and the ramping-up of both digital transformation and digital infrastructure as the demands of AI and other emerging technologies begin to place strain on existing facilities.
Despite some promising signs of recovery towards the end of the year, 2023 was not a year for the M&A history books. While 2024 may bring a possible path out of the doldrums, deal makers will need to get used to the new normal of high interest rates for at least a while longer, which will prolong the increased cost of debt for potential dealmaking.
Private equity firms have been affected most by current market conditions, reflecting the impact of higher interest rates. Looking forward, however, the lack of interest rate changes from the US Federal Reserve (the last increase being in July 2023) and other central banks and signals from the European Central Bank that its campaign against rising inflation may be showing signs of success suggest the possibility of decline in interest rates on both sides of the Atlantic in 2024. Absent deal activity and viable alternatives, such as IPOs, private equity firms have focused on portfolio management and consolidation, in turn contributing to a pipeline of attractive M&A targets for the future. These firms have a proven track record in adapting to macroeconomic trends and spending time identifying optimal targets, and as such it seems they will continue to thrive in this environment – and there is also more dry powder at the disposal of private equity firms than ever before ($2.6tn as of time of writing ), such that a stabilisation or fall in interest rates and a lessening of restrictive bank lending practices will enable private equity sponsors to return to a more effective position of deal leverage, and this along with a realignment of buy- and sell-side valuations may ignite a new round of deal making.
In the absence of a flurry of private equity-led deal activity, cash-rich corporates, who are not reliant on debt financing, will be in the position to take advantage of reduced valuations to acquire targets at a discount. While antitrust scrutiny will make corporate acquirers continue to take a hard look at regulatory risk, M&A will enable companies to expand into new businesses and improve their offerings. This is expected to be a key driver of dealmaking in 2024, as digitalisation is high on the strategic agendas of many companies as they seek to innovate and adapt in response to, and to take advantage of, disruptive technologies. We also expect that 2024 will bring new developments in how M&A acquirers leverage AI to source and evaluate deals. As legal practitioners, alongside our clients, we are exploring the use of AI in completing M&A while ensuring alignment and a clear understanding of the quickly developing legal framework designed to regulate such activities.
Norton Rose Fulbright – Global M&A Trends & Risks 2024
Norton Rose Fulbright – What forces will shape European private equity in 2024?
Atomico – State of European Tech 2023
Bain & Company Global M&A Report 2024
BlackRock 2024 Private Markets Outlook
China's outbound investment reshaping the global economy – Asia Times
Cisco press release 18 March 2024: Cisco Completes Acquisition of Splunk
Datasite – Deal Drivers: Americas 2023 Outlook
Datasite – Deal Drivers: Americas 2024 Outlook
Datasite – Deal Drivers: Americas FY 2023
Datasite – Deal Drivers: Americas Q3 2023
Datasite – Deal Drivers: APAC FY 2023
Datasite – Deal Drivers: APAC Q3 2023
Datasite – Deal Drivers: EMEA 2023 Outlook
Datasite – Deal Drivers: EMEA FY 2023
Global M&A industry trends: 2024 outlook – PwC
Has the fight against inflation been won? – europa.eu
Preqin – data accessed 23 February 2024
PwC – Global M&A Industry Trends: 2023 Mid-Year Update
PwC – Global M&A Industry Trends: 2023 Outlook
PwC – Global M&A Industry Trends: 2024 Outlook
PwC – Global M&A trends in technology, media and telecommunications: 2024 outlook
SAP Invests in Aleph Alpha, Anthropic, Cohere – SAP News Center
Silver Lake and CPP Investments Complete Acquisition of Qualtrics – Qualtrics
The State of the SaaS Capital Markets: A Look Back at 2023 and Look Forward to 2024 – Sapphire Ventures
Publication
Miranda Cole, Julien Haverals and Emma Clarke of our Brussels/ London offices are the authors of a chapter on procedural issues in merger control that has been published in the third edition of the Global Competition Review’s The Guide to Life Sciences. This covers a number of significant procedural developments that have affected merger review of life sciences transactions.
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