Financial markets can be filled with contradictions and the recent mid-term outlook for tech deals is no different. Deal volume is down, but deal value is up — a sign of the rise of megadeals. Broader macroeconomic uncertainty, what does this mean, and what can we expect in the second half of 2022?
The first part of the year was dominated by increasing geopolitical turmoil and an uncertain economic outlook — factors that dampened M&A activity. However, to differentiate themselves in an increasingly competitive market, market consolidation continues to push them to innovate quickly as a way to accelerate growth. These two competing trends are expected to continue through the second half of 2022, providing ample opportunities for megadeals to rise — especially in software.
Volume is down, but prices are up.
The data paint an interesting picture. In the year There were 677 announced technology deals in the first half of 2022 — a 36.7 percent decrease from the same period last year. This is likely due to rising inflation, a depressed stock market and the increasing likelihood that the US and the rest of the world will enter a recession within the next six months.
At the same time, total deal value increased nearly 60 percent from $172.8 billion in the first half of 2021 to $272.4 billion in 2022 — largely driven by megadeals. In fact, in the first half of the year, 14 megadals accounted for 80% of the total contract value, while the average deal size grew 30% year-on-year to $186 million.
Expect more of the same in the second half of the year
These large technology companies are realizing the growing customer expectations and looking to provide a complete range of services and platforms to customers. Big tech players want to accelerate adoption by acquiring these end-to-end experiences rather than developing them in-house.
Here are three things to look for in tech deals in the second half of 2022:
1. Expect more public to public agreements
Customers want to connect with their favorite brands when and where it’s convenient for them and on their own terms. Engagement should be seamless across both physical and digital channels. Big tech companies are striving to create end-to-end experiences on a single platform. Filling these gaps through acquisition rather than internal development accelerates time to market and provides large technology companies with a tried-and-true solution that is market-tested and can be seamlessly integrated into their platforms. Expect more from these megadeals in the coming months as the major technology players continue to support each other to become the trusted technology experience provider of all futures.
2. Opportunities for strategic and financial buyers will increase
Changes in valuations and associated multiples combined with a dramatically altered liquidity and fundraising environment will open up opportunities for opportunists. Lower valuations benefit both strategic and financial buyers, as once off-the-shelf acquisitions become more affordable. Target companies may need to adapt to the “new normal” — adjust valuation assumptions accordingly and view M&A as an alternative exit route as the supply of other liquidity options (such as an IPO, SPAC or additional fundraising) shrinks.
3. The software stays fresh
Increased competition and the need for business efficiency are driving up the cost of technology – and this is likely to continue even as we enter the recession. Businesses are under increasing pressure to do more with technology-enabled operational efficiency. Software — particularly in the areas of cloud, data analytics, collaboration and cybersecurity — appears to benefit from this business agility. In the second half of the year and into 2023, look for M&A activity involving innovative software companies to continue to dominate deals in technology, and financial buyers to leverage “private” deals.
It is time to look ahead.
The number of deals may be slowing, but the outlook for technology deals in the second half of 2022 remains strong due to a strengthening market and increasing megadeals. In the short term, we expect deal rates to slow due to financial prudence, but deal rates to rise as large technology providers move aggressively to build their platforms to meet customer needs.
Hang up. It’s going to be a wild ride.
