Recent studies show that global tech M&A is plentiful. This year is on a path to be a record year for global M&A generally, reaching a record $3.9 trillion in deals by September, with the tech sector accounting for 21% of all M&A activity—up from 16% last year, according to data reviewed by Freshfields.
A key factor in this growth is the need for established businesses across industries to buy their way into transformation—making M&A stay relevant—in a period of intense tech innovation which is driving change across sectors and in our daily lives.
Along with the upward trend, however, companies need to pay attention to the increase in U.S. and international regulations relating to international and national security issues and consumer protections.
The Desire for Innovative Technology
Tech M&A has an important role to play in encouraging innovation. Tech start-ups have proliferated, finding entirely new ways to facilitate services, in some instances creating new market places and identifying new sources of value. These endeavors take skill, time, and dedication in large measure and a big dose of risk. For all the successes we hear about, there are many more start-ups that flounder leaving entrepreneurs and early investors out of pocket.
A material factor for innovators taking such risks and in attracting early stage funders is the very real prospect of being able to sell the start-up to an established player. Proof of concept may be sufficient to draw interest from an established player who has the wherewithal to accelerate commercialization of a use case or rapidly roll out a concept across markets enabling the concept to reach its potential.
Established players across industries who are trying to harness new technologies to transform and enhance their capabilities and services acquire new functionality, IP, talent, and businesses. Established tech players do the same. Established financial investors, including private equity players, acquire innovative tech businesses where they can see excellent prospects for growth and consolidation. Tech M&A by established players is highly important in fueling innovation.
Supply Chain Considerations
At the same time, trade wars and shifting geopolitical relations, the pandemic, and environmental concerns are driving companies to rethink supply chains and to reduce dependencies. Given the importance of tech to almost every industry today, the tech supply chain is center stage whether in relation to design, manufacture, or assembly.
The global semiconductor shortage is a case in point, giving rise to delays in supplies of anything from cars to phones. As businesses move to bring supply chain elements in house or just closer to home, this is reshaping the landscape for suppliers.
M&A is a means of rearranging supply chains as well as being a means for suppliers whose book of business is changing to seek consolidation or investment for a boost or even for survival. In light of this, software in the logistics space is highly sought after. For example, Panasonic paid $7.1 billion to buy an 80% interest in U.S. supply chain software company Blue Yonder from PE firms Blackstone and New Mountain Capital.
When these factors are considered alongside the strong performance of the tech sector relative to other sectors and the opportunity for online activity highlighted by the pandemic, it is tempting to think we have the perfect storm for tech M&A.
Headwinds from Regulators
But this burst of M&A is not without some headwinds. Along with technology which has the power to reshape the way we live our lives in almost every respect and to drive new economic models—and which can operate seamlessly across borders—comes scrutiny from regulators around the globe.
The implications of AI, data and quantum computing are central to the work of regulators tasked with preserving national security; national interests and assets; and protecting consumers. While regulators and businesses alike are learning and transforming, deals will take longer to be cleared and may face more hurdles.
Many countries are bolstering their foreign investment and public interest laws to focus on tech and data assets taking inspiration from the U.S. where the Committee on Foreign Investment in the U.S. (CFIUS) scrutinizes in-bound investments for national security concerns and constantly reassesses changing security vulnerabilities including those linked to emerging technologies and data capabilities.
For example, the U.K. is beefing up its review of M&A deals with the National Security and Investment Act 2021 which, starting Jan. 4, will require notification of investments (crossing certain share/voting thresholds) in 17 strategically sensitive sectors including AI, data infrastructure, quantum technologies, synthetic biology and advanced robotics.
These regimes have typically been devised to enable regulators to consider the effects of M&A involving smaller players like the start-ups mentioned above. There are very few hard lines here. Deal-makers need to understand CFIUS’ and other regulators’ views on relevant issues, to be prepared for longer deal timeframes and to accommodate enhanced scrutiny.
Furthermore, long-term value and growth potential of tech targets may be impacted by a raft of legislative proposals addressing consumer protection, privacy, tax, and the gig economy. Diligence on tech targets needs to take into account the potential impact of prospective legislation on the value of investment, with a particular focus on data and IP. These regulatory headwinds may give rise to an increase in joint ventures and partnering arrangements as an alternative to buyouts.
So, while tech M&A shows no sign of slowing and investor appetite remains strong at the moment, acquirers need to be sighted on incoming and evolving legislation that will complicate the deal environment and value of tech targets.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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Natasha Good is global co-head of Freshfields Tech Media and Telecoms group in London. She is a corporate partner handling mergers and acquisitions for tech and communications clients. She works globally, with activity spanning Europe, U.S., Middle East, Asia, and Africa.