A new survey by Morrison & Foerster, a leading global law firm, reveals that dealmakers are becoming increasingly split on what lies ahead for deal activity in the technology space.
According to the findings, the majority of dealmakers ( about 40 percent), expect activity to increase over the next 12 months while 32 percent predict activity will remain the same, and 28 percent anticipate a decline.
Although most dealmakers remain bullish, the results show a narrowing gap, with more respondents delivering a cooler forecast than they did in October 2018, when the last survey was conducted.
The report found that economic factors accounted for most of the dealmakers’ concerns, with 61 percent citing fears of a potential recession and 57 percent citing tariffs or trade disputes as possible deterrents to future deals.
“I don’t think it’s surprising that dealmakers have mixed opinions at this time,” said Eric McCrath, co-chair of Morrison & Foerster’s Corporate Department. “The environment is changing. There are a number of unprecedented economic factors and political situations currently at play that make accurately forecasting future deal activity more difficult. Also, 2018 was a record year for tech M&A. We’re beginning to see those highs level off and return to a more sustainable model.”
According to 451 Research’s M&A KnowledgeBase, 2019 tech M&A activity currently trails in comparison to the bullish deal volume and value totals of 2018. In the first three quarters of 2019, nearly 2,700 deals valued at $356 billion were completed, whereas 2,854 deals, valued at $447 billion, were completed over the same period in 2018.
Additional key findings, takeaways, and analysis from the Tech M&A Leaders’ Survey include:
Private Equity forecasts are also mixed
Respondents were also split on how they think tech acquisitions by private equity firms will proceed in the next 12 months.
35 percent of the respondent say they are expecting an increase in activity, 37 percent predicts activity will stay the same while 28 percent say they are anticipating a decrease. According to 451 Research, private equity deals are currently at a slight decline this year, with financial sponsors having completed 7 percent fewer deals so far in 2019, compared with last year’s record activity. Eight out of ten survey respondents point to higher pricing as a cause for this year’s dip in deals, while nearly the same number (70 percent) believe that the need to put more equity into each deal also played a part.
Cross-border M&A is at a crossroads
While cross-border M&A is expected to decline across most regions, targets in Asia-pacific are most likely to be impacted with 48 percent of respondents, say they expect a decrease in deal flow into the region by international acquirers. This number is slightly less for Western Europe, where 42 percent of respondents predict a decline.
The majority of respondents think cross-border activity will remain consistent in South America (58 percent) and the Middle East and North Africa (52 percent), while respondents were evenly split about their predictions of North America: 32 percent think acquisitions by international acquirers of North American targets will increase, while the same number project a decrease.
Trade disputes are considered the biggest potential hindrance to future international acquisitions, with 73 percent of dealmakers citing it as a concern. Dealmakers are also taking Brexit into account, with 58 percent anticipating it having an impact. A higher percentage of respondents are also more concerned with Committee on Foreign Investment in the United States (CFIUS) than they were last year, with 70 percent citing CFIUS as a possible deterrent to deals compared to 54 percent in October 2018.
A drop in valuations is anticipated
A little more than half (54 percent) of respondents expect private company M&A valuations to decrease in the next 12 months. This correlates with current market trends, according to 451 Research, which found that among private tech companies selling for $100 million or more, the median multiple stands at 5x trailing revenue in 2019, down from 5.3x last year. About the same number (56 percent) believes both corporate acquirers and private equity firms will pay lower multiples on future deals.
