Technology M&A 2024

Overview

Welcome to the third edition of Chambers’ Technology M&A Guide.

The very fact that Chambers launched this guide two years ago is an indication of how important technology M&A has become, notwithstanding major challenges that the industry has been facing over the last few years and how distinct transactions in this area are compared to any other industry.

Building on the success of the last two editions, we are happy to have expanded the coverage of the guide this year and, in addition to welcoming back our past contributors, we extend a warm welcome to our new participants from several countries.

The unique aspects of technology deals are rooted in the life cycle of a typical technology company. It often begins with a dream that takes an entrepreneur on a journey:

• from a start-up funded by friends and family allowing the founder to develop that first product in the proverbial “garage”;
• to creating a business model;
• to then trying to convince professional sources of venture capital (VC) of the start-up’s viability and prospects as a business;
• to several rounds of funding (for those lucky few who succeed); and
• to the ultimate goal of any entrepreneur – turning the company into a “unicorn” (ie, achieving valuation in excess of USD1 billion) and having it listed on a major stock exchange as a public company or sold at a high multiple.

Technology M&A is also unique because of its multidimensional nature: there is a strong push for consolidation within the tech industry itself, but the fact that technology is disrupting every other industry has also led to traditional companies investing in or buying technology companies:

• automakers are looking at electric vehicle start-ups and software developers;
• industrial companies are exploring deals in automation or carbon recapture technologies; and
• financial institutions are looking at fintech companies.

Artificial Intelligence (AI) was just a futuristic concept for anyone outside the elite group of IT professionals, but it burst into our lives last year and captured the imagination of everyone who tried the power of ChatGPT and other generative AI technologies. Now, every executive is looking at how AI will change their businesses and industries. The recently published Lloyds Bank’s eighth annual Financial Institutions Sentiment Survey highlighted that 80% of senior executives at UK financial institutions said that advancements in AI will bring significant changes to the UK economy. Out of those participants in the survey who said that their companies are already investing in AI:

• 79% are expecting improved productivity;
• 75% are expecting better client experience; and
• 69% are expecting greater insights into customers.

AI is still in its infancy, but it is already clear that it will change the way we live, do our jobs and interact with each other.

The Technology Industry and COVID-19

The COVID-19 pandemic disrupted life in many ways and made technology an even more important part of how people work, live, and are educated and entertained. Technology start-ups that were relatively unknown before, such as Zoom and Teams, became household names, and well-established tech companies like Amazon benefited enormously from our reliance on them during the lockdown, and from the seismic shift in consumer habits. As can be seen, many of those habits became irreversible. The war in Ukraine has also pushed people in Ukraine, as well as those in other parts of the world who stay in regular touch with them, to rely on technology to communicate and send support to families and friends. 

There were several reasons for the technology boom in 2020–2021. The lockdown and remote working environment during the pandemic pushed businesses to use technology for:

• daily meetings;
• employee communication and collaboration;
• maintaining operations;
• using the cloud for collecting and sharing business information; and
• maintaining robust security protocols to protect the company from external threats.

The importance of technology had been recognised for decades before the pandemic, and the growth potential of tech companies was used to justify their valuation at a high multiple – though the pandemic pushed valuations to levels never seen before.

After the technology boom in 2021, the industry faced major headwinds in 2022. Fears of inflation and the related actions of the central banks, as well as overextension of commitments by financial institutions in prior years, shut down financing markets. Combined with the major disruption from Russia’s invasion of Ukraine and the energy crisis, this created a level of economic uncertainty not seen in decades, and led to a very significant volatility in securities markets. High valuations came down to earth. Corporates reduced or paused technology purchases and slowed down online advertising, impacting on tech companies’ earnings in a major way.

The significant decline in earnings contributed to a large number of employee layoffs across the technology industry, from those that make hardware (such as HP) to social media titans (such as Meta). Some of these trends are continuing. As the US section points out based on data from Crunchbase (which has compiled and maintains a list of layoffs that have been publicly reported since the beginning of 2022 by US tech companies), 2022 saw layoffs of more than 93,000 employees; and through October 2023, nearly 180,000 additional employees were laid off. However, there is optimism that these mass layoffs may be nearing an end. After more than 80,000 employees were laid off at the peak in January 2023, the number of layoffs was:

• fewer than 40,000 employees in each of February and March;
• fewer than 20,000 in April; and
• lower in each successive month since then, through September 2023.

Failures at several prominent market participants in the blockchain and cryptocurrency market have disrupted that segment of the technology sector. The news of the FTX bankruptcy came out in November 2022, and highlighted major concerns about the dealings of a tech billionaire and the reported shortcomings of sophisticated investors backing FTX. Even after criminal conviction of its founder, FTX will stay in the news for a long time, and its failure will continue to affect the technology industry and the VC community. Conversely, the impending launch of cryptocurrency ETFs has revived interest in cryptocurrencies and brought values of a number of them back up.

Early Access to Funds

Notwithstanding this year’s challenges, the clout of tech companies is reflected in their ability to access capital. As reports from different jurisdictions in this guide highlight, start-ups with innovative ideas can find funds to enable them to start and grow. In many countries, an entrepreneur starts with money from “friends and family” and angel investors, but some countries have proactively set up structures for providing capital to tech start-ups.

For example, a state-owned VC firm, Almi, provides equity and debt capital to emerging growth companies across a variety of industries in Sweden. In South Korea, as described by contributors from Kim & Chang in this guide, upon the adoption of the Act on Special Measures for the Promotion of Venture Businesses, a fund managed by the government-sponsored Korea Venture Investment Corporation has been actively providing financing and credit guarantees to promising start-ups and funds in the country. Similarly, in Ukraine, as described in the contribution from Integrites, the government has allocated funding for the Ukrainian Start-up Fund to help develop the technology industry.

Of course, domestic and international VC funds are always looking for new opportunities to invest, as the VC market has become increasingly more global.

Volume of M&A Deals

For well-established technology companies, there often comes a point where the founders and the venture capitalists decide whether to pursue their growth strategy alone or sell to a larger and stronger player. As the overall M&A market during the early days of the pandemic was down by over 50%, technology M&A was booming and became one of the brightest spots in deal making from late spring 2020 through 2021; subsequently, 2022 saw a very significant decline.

This trend is unfortunately continuing in 2023. According to the Information Week quoting LSE Group’s report, technology M&A declined by 55% in the first nine months of 2023 compared with the same period last year, with a total value of USD286.4 billion (and accounting for 14.5% of the global market). It was the worst year-to-date performance for the tech industry in six years. However, deal volume was up slightly, increasing by 1% year on year. The M&A market, particularly in the USA, has been significantly impacted by a difficult antitrust environment, which practitioners are expecting to continue to affect deals, notwithstanding some recent victories that companies scored against regulators.

Staying Independent

Technology companies that decide to continue their journey as independent players can choose from a larger-than-ever menu of options:

• an IPO;
• a direct listing; or
• a de-SPAC transaction (ie, a merger with a special purpose acquisition company – although de-SPACs have significantly declined as an option for a number of reasons).

All of these types of transactions have been actively pursued over the last 18 months, and we have also seen a number of spin-offs of tech companies by their parents. 

IPOs

Unlike 2020 and 2021, when the IPO market was booming and companies that were ready for an IPO had a readily accessible public market for capital, 2022 saw one of the most challenging IPO environments in years, with the challenges continuing in 2023.

According to CNBC quoting Renaissance Capital, 96 IPOs in the first nine months of 2023 raised USD18.8 billion – admittedly an increase from USD7.7 billion in 2022, but significantly lower than the roughly USD50 billion that a “normal” year would see.

When IPO markets are strong, many companies choose to launch an IPO in their home markets and list on their home country’s stock exchange; while others opt for a listing in the USA, as it is one of the largest and most liquid capital markets in the world. Practitioners need to be careful, however, as in some jurisdictions a future M&A deal may be hampered by listing exclusively outside the home market, and rules relating to public acquisitions may be part of the home country’s stock exchange regulator and may not be available for companies incorporated but not listed in the country. For example, a buyer of a company incorporated in France with shares listed solely in the USA may find it difficult to perform a squeeze-out after a tender offer.

Many countries create incentives for a domestic listing and try to streamline securities regulations to encourage companies to list at home. For example, the Brazilian Securities and Exchange Commission (CVM) has launched a public hearing to revamp regulation of public offerings of securities, to expand access to capital for domestic companies and streamline the registration process.

Changes to US listing rules, first proposed by the NYSE and approved by the SEC at the end of 2020, have facilitated the direct listing of companies, coupled with the ability to raise capital in the process without pursuing a traditional IPO. As a result, a number of companies opted to pursue direct listing in the USA at the time, though so far this approach has not seen wide adoption.

SPACs

During the pandemic, SPACs provided an alternative path for a company to go public. Although SPACs existed in the USA for many years, they became a hot trend during the pandemic. According to Statista, there was:

• one US SPAC issuance in 2003;
• 20 in 2015;
• 59 in 2019; and
• 249 in 2020, with that number being outshone in 2021 with about 500 SPAC deals.

The SPAC market has been pretty much shut down in 2022 and 2023, with very few SPAC and de-SPAC transactions completed. Some of this was due to:

• the overall disruption of the IPO market;
• stricter regulations of SPACs; and/or
• high-profile failures of SPACs.

The main trend in 2022–2023 for SPACs seems to be redemptions, as many SPACs are approaching their end-of-life.

SPACs are set up by raising money from public investors for the specific purpose of finding an acquisition opportunity. If a SPAC finds it, the private target:

• is merged into the SPAC in a so-called de-SPAC transaction (yet another alternative to a traditional IPO);
• gets additional funding through a PIPE investment; and
• becomes a publicly traded company at closing.

As an alternative to an IPO, a de-SPAC transaction is more likely to be pursued by less established, younger companies. Prevalent in the USA, SPACs started pursuing cross-border deals in 2021, and some countries were developing regulations to facilitate SPAC listings in their markets. For example, the UK Financial Conduct Authority (FCA) adopted changes to its listing rules in August 2021 to make the UK a more attractive jurisdiction for SPACs. Similarly, in November 2021, SIX Swiss Stock Exchange (SIX) announced that it had adopted regulations to allow listings of SPACs starting on 6 December 2021. As the trend in SPAC transactions has reversed, so did the desire of regulators and exchanges to facilitate them, with a number of regulators adopting a stricter approach to SPACs.

Spin-offs

Spin-offs of subsidiaries by parent companies, to achieve various corporate and financial purposes, have also been explored by technology companies. Tech companies are not new to spin-offs, as many of them came into being as independent companies as a result of a spin-off. AT&T’s spin-off of Lucent, and eBay’s separation of PayPal, are just two of many examples from the past.

The trend continued in 2021 with Dell spinning off VMware, SAP similarly splitting with Qualtrics, and Telus launching an independent Telus International. In 2022, few technology spin-offs were announced; however, a number of them have been discussed, and 2023 saw an increase in the number of spin-offs. Notable recent spin-off transactions include GE Healthcare, PHINIA (a former business of BorgWarner), Madison Square Garden Entertainment and Atlanta Braves, among others.

Regulatory Tightening

As deal making in the technology industry has become increasingly more global, and with technology often being viewed as a strategic, defence and national security priority, regulators in different jurisdictions have been tightening requirements in their markets. Antitrust authorities have been challenging technology transactions more aggressively (even challenging perceived dominance of tech companies in a particular market), while foreign direct investment (FDI) regulations have been tightened in different parts of the world to protect nascent technologies from being acquired by foreign buyers. The USA has recently strengthened its FDI regulations and introduced mandatory filings, with a specific focus on the technology industry. France, Germany and the UK have adopted stricter requirements for acquisitions of tech companies in their jurisdictions, and the EU has adopted new co-ordination regulations across the region to share information and collaborate in FDI enforcement.

The US antitrust regulatory landscape, in particular, has seen significant developments in 2023, not only with US antitrust authorities continuing to aggressively challenge transactions, but also with the proposal of a set of revised merger guidelines in July 2023. The proposed guidelines (highlighted in the US section of the guide) formalise the more aggressive antitrust enforcement strategies, and include dramatic revisions that would lead the US antitrust authorities to challenging a much larger number of M&A transactions as harmful to competition.

Using This Guide

As cross-border technology deals are often very complex and involve different legal regimes and different cultures, we have organised this guide by country and asked each country’s contributor to address the same set of issues that a technology company going through its lifespan faces – from incorporation and early funding, VC rounds, to the ultimate goal of being a public company or being sold at a high premium. We hope that you find this guide useful as you consider global deals.