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North America TMT Trendspotter: Abysmal 1H23 points to year-end M&A bounce

A storm of uncertainty caused US technology, media and telecommunications M&A to largely collapse during the first half of 2023, but market participants expect pent-up demand and a looming end to interest-rate increases to fuel a rebound by year's end.

What began as a slow start to 2023 in the first quarter turned into an outright rout in 2Q, with TMT dealmaking plummeting 70% compared to the first half of last year, and more than 80% from the record 1H21, according to Mergermarket data.

The number of deals completed in the first half of 2023 was the lowest since the second half of 2018, dropping below even the depths of the pandemic in 1H20.

Causes for the deal drought range from the high cost of debt and tighter lending, to depressed stock prices, a lack of seller-buyer alignment, and the most aggressive antitrust enforcement environment in decades, advisors said. 

Amid talk of pent-up demand and a pipeline full of companies ready and waiting to do deals, a myriad of headwinds kept many sellers from coming to market.

“The lack of willing sellers across the technology sector is perceptible,” said Kevin Brunner, co-head of global M&A at Bank of America.

Transactions of USD 5bn to USD 10bn have found a floor, noted Brunner, adding that he expects to see an uptick of deals in that range going forward.

Private equity activity, in particular, declined sharply, as the number of sponsor buyouts in the second quarter fell more than 83% from the same period a year earlier, reaching the lowest level since late 2011, Mergermarket data shows. 

“There weren’t a lot of willing sellers of private assets in the market, and so sponsor-to-sponsor and venture capital-to-sponsor transactions were very sparse,” said Max de Groen, a partner at Bain Capital Private Equity.

In addition to pressure from interest rate hikes, the first half of 2023 saw banking-sector uncertainty, including the shutdown in March of Silicon Valley Bank, a key source of capital and liquidity to the technology sector.

While it may be too soon to fully evaluate the impact of the loss of SVB to dealmaking, the resulting tighter credit conditions are clearly having an effect as acquirers seek to keep dry powder amid falling valuations, said Robert Berstein, managing director at investment bank JEGI CLARITY.

“Neither PE nor the seller wants to over-lever because that precludes significant acquisition plans,” he said, adding that he anticipates a rebound in stock prices to precede a bounce-back in deal activity. 

Investors are rightly concerned about the performance of targets, as macroeconomic headwinds and reduced technology spend cause companies to fall short of projections for revenue and SaaS retention rates, said Eric Crowley, a partner at boutique investment bank GP Bullhound.

Businesses that would have gotten deals done in prior years often are not even getting bids in this market, while other clients continue to command great prices, he said.

“It’s very nuanced dealmaking; you can’t just run these huge, broad auctions and expect 20 people to show up with term sheets,” Crowley said. 

In this environment, it is as important as ever that parties have a robust rationale for why a conversation should be taking place and, then, why a deal should happen, he added. 

Hawkish regulators

Another inescapable source of uncertainty stems from the hawkish antitrust regimes around the world and, increasingly, in the US, where the enforcement posture is as hostile to transactions as at any time in decades – particularly those involving technology.

In one recent case, attorneys for Microsoft [NASDAQ:MSFT] last month threatened the company would pull the plug on its proposed USD 69bn takeover of Activision Blizzard [NASDAQ:ATVI] if a federal judge granted a preliminary injunction sought by the US Federal Trade Commission. That injunction was denied last week and the FTC has appealed the ruling.

Even smaller deals, like Thoma Bravo’s proposed USD 2.3bn acquisition of cybersecurity firm ForgeRock [NYSE:FORG], have faced long and bumpy reviews amid new scrutiny of private equity. The US Department of Justice is said to be nearing a decision on whether to challenge that deal, as reported.

“People are watching that and trying to figure out if they’re going to do something in those areas, given the increased scrutiny that there is right now on transactions, especially large ones,” said Kevin Bogle, TMT industry leader for the deal advisory and strategy practice at KPMG.

Deals like Nasdaq’s [NASDAQ:NDAQ] proposed USD 10.5bn acquisition of risk management and regulatory software provider Adenza from Thoma Bravo, announced last month, offer an encouraging green shoot, and mark the type and size of deal of which participants will want to see more, he said.

Supply on the sidelines

Between companies that put off plans to do a deal last year in the face of rapidly rising rates, and those businesses that newly need or want to do something, there are many conversations and preparations underway, said Jeremy Swan, managing principal of the financial sponsors and financial services practice at CohnReznick.  

“Through many conversations with private equity firms and banks, they just haven’t come to market,” Swan said. “In a lot of cases, they’re sitting there on the fence, whether to launch it or not.”  

One media deal that did come together at the start of 2Q was Endeavor Group’s [NYSE:EDR] acquisition of World Wrestling Entertainment [NYSE:WWE], announced on 3 April, which valued the latter at USD 9.3bn.

This month’s Fed rate decision will loom large, in terms of how quickly deal activity can rebound. A decision to raise or pause only temporarily could extend the uncertainty and push a rebound into the fourth quarter or beyond, he said.

A more definitive signal that the Fed is finished raising – or nearly so – is likely to trigger demand, leading to a rebound as early as this quarter, several market participants agreed.

Looking ahead

An increase in M&A activity in TMT tends to coincide with a healthier market for initial public offerings, noted John Potter, US deals clients and markets leader for PwC, which also sees an uptick in M&A activity toward the end of the year.

Next year “certainly bodes well for greater M&A volume,” Potter said. Even so, the high cost of money could continue to be a headwind for some time.

“The capital situation that we’re looking at today is very different than what we’ve seen in previous cycles,” Potter said.

Recent strengthening of financing markets and an increase in private sellers preparing for processes points to increased activity ahead, said de Groen, the Bain partner.

Another driver of M&A is likely to be divestitures by larger media and marketing companies, JEGI CLARITY’s Berstein said. In April, JEGI CLARITY advised Nomura Research Institute in its sale of Dallas-based loyalty and customer engagement software firm Brierley & Partners to PE-backed Capillary Technologies

Last week, Disney [NYSE:DIS] CEO Bob Iger told CNBC that its TV and cable businesses, like ABC and cable network FX, “may not be core” to the company’s operations.

“A lot of companies are not in the market yet, but are open to conversations,” Berstein said.