Mergers + Acquisitions and China
SAN FRANCISCO (October 10, 2017) – Morrison & Foerster, a leading global law firm, today announced the results of its semi-annual Tech M&A Leaders’ Survey, which shows dealmakers expect technology M&A to remain robust over the next 12 months. Slightly more than half of survey respondents (51%) expect deal flow to increase over the next year when compared to the previous year, while only 19% anticipate a slowdown. Forty-five percent of respondents forecast that private company M&A valuations will remain steady, with 31% anticipating a decrease in pricing.
“It is encouraging to see such a bullish forecast, particularly following Q3 closing with a higher aggregate value of deals than the previous quarter,” said Robert Townsend, co-chair of Morrison & Foerster’s Global M&A Practice Group. “A significant percentage of dealmakers clearly expect tech M&A to have a strong and sustainable growth trajectory buoyed by new innovations and a healthy outlook for private equity spending.”
The positive sentiment comes despite a decline in the total number of global tech and telecom deals over the first three quarters of the year, when compared to the same time periods in the previous two years, according to 451 Research’s M&A KnowledgeBase. The drop in deal volume is mostly attributable to less shopping by corporate acquirers, which respondents indicate are facing high valuations and finding fewer suitable targets.
Other key findings, takeaways, and analysis from the Tech M&A Leaders’ Survey include:
Private Equity Spending to Increase, Find New Targets
The majority of respondents (59%) forecast an increase in private equity (PE) activity and a similar number (53%) expect PE firms to be more competitive with corporate acquirers over the next 12 months. According to 451 Research’s M&A KnowledgeBase, 2017 marks the first year in history that PE firms have announced more tech acquisitions than the public companies who typically dominate the sector.
PE firms have accelerated their activity by broadening the range of companies they target. Nearly three-quarters (72%) of respondents said the increase in deals in recent years has been strongly influenced by PE firms going after “non-traditional” companies, which may include smaller startups. This is expected to continue, with 74% of dealmakers forecasting an increase over the next two years in the number of PE acquisitions of growth companies, as opposed to the mature businesses buyout firms have previously preferred.
Acquirers Prioritize Strong Cybersecurity Policies
A vast majority of dealmakers (82%) report that during their due diligence processes, acquirers are putting increased emphasis on the cybersecurity standards and practices of target companies. Only 1% of dealmakers said they are giving it less attention. This continues a trend from the Tech M&A Leaders’ Survey that was released in October 2016, in which the same number of respondents (82%) noted a heightened focus on cybersecurity issues by acquirers.
Cross-Border Transactions Shift Under New Policies
Revised trade policies and priorities coming out of the Trump administration as well as recent indications that CFIUS may be more willing to intercede in M&A are impacting the flow of cross-border transactions, according to dealmakers. Seventy-one percent of respondents ranked CFIUS as a factor contributing to a slowing of deal volume and value between China and North America and half of respondents indicated that China’s regulatory approval process exerted similar downward pressure. Looking forward, 51% of dealmakers anticipate that U.S. trade policies will lead to an increase in Chinese acquisitions in countries other than the U.S. and 24% anticipate no effect.
That said, Chinese investors remain strongly interested in U.S. tech companies due to the quality of the targets and better valuation than domestic targets, according to Chuan Sun, a partner in Morrison & Foerster’s China Outbound Group. “While CFIUS is certainly of concern to Chinese investors, many of them are still actively looking for investment opportunities involving U.S. tech targets in their pursuit of a strong technology edge, particularly in less sensitive areas.”
Emerging Technologies Drive Deals
With the growing promise that multiple new technologies will have a transformative impact across a range of industries, dealmakers expect that businesses focused on these areas will be hugely attractive to investors. A significant number (88%) of respondents believe that machine learning and Artificial Intelligence (AI) will be a strong driver of M&A over the next three years. This compares to 67% of respondents who project that the Internet of Things will be a strong driver during the next three years and 39% who expect the same from Blockchain.
Find out more about the survey results.
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