Technology M&A 2023

Overview and Introduction to Chambers’ Second Technology M&A Guide

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

The very fact that Chambers launched this guide last year is an indication of how important technology M&A has become, notwithstanding major challenges that the industry has faced in 2022, and also how distinct transactions in this area are compared to any other industry.

Building on the success of the inaugural edition last year, we are happy to have expanded the coverage of the guide this year. Especially welcome is a contribution from one of the leading Ukrainian law firms, Integrites, on technology M&A in Ukraine, as the country defends its freedom and the right to exist. Very few people outside of the industry know it, but Ukraine is a major player in technology, given its decades-long history in computer science education and research; as a result, it boasts many highly qualified and entrepreneurial IT professionals.

The unique aspects of technology deals are rooted in the lifecycle 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 that allows 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 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 – to turn the company into a “unicorn” (ie, to achieve valuation in excess of USD1 billion) and have 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 we also see how the fact that technology is disrupting every other industry has 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. Although more immediate concerns are preoccupying corporate leaders this year, still, according to the recently published Lloyds Bank’s seventh annual Financial Institutions Sentiment Survey, 60% of senior executives at UK financial institutions said technology, automation and digital investment are their top strategic priority for the next 12 months (a very significant number, although it is down from 77% last year).

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 get educated and entertained. Technology start-ups that were relatively unknown before, like Zoom and Teams, have become household names, and well-established tech companies like Amazon have benefited enormously from our reliance on them during the lockdown and from the seismic shift in consumer habits. 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.

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, but the pandemic pushed valuations to levels never seen before.

What a difference a year makes though. This year, the industry has been facing major headwinds. Fears of inflation and the related action of the central banks, as well as overextension of commitments by financial institutions in prior years, have shut down financing markets. Combined with the major disruption from Russia’s invasion of Ukraine and the energy crisis, it has created the level of economic uncertainty that we have not seen in decades and has led to a very significant volatility in securities markets. High valuations, that last year were accepted as a new normal, came down to earth. Corporates reduced or paused technology purchases and slowed down online advertising, impacting 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 (like HP) to social media titans (like Meta). As the US chapter of this guide highlights, layoffs were reported at more than 300 companies across the industry and have impacted over 65,000 employees. 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, coinciding with the time of this writing, and it is already highlighting major concerns about the dealings of a tech billionaire and the reported shortcomings of sophisticated investors backing FTX. FTX will stay in the news for a long time and its failure will continue to impact the technology industry and the venture capital (VC) community.

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 to provide capital to tech start-ups. For example, a state-owned venture capital 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 venture capital market has become more and more global.

Reduced 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. In 2022, the number of US technology M&A deals is down about 30% year-to-date from last year, but, partly because the broad M&A market has declined even more (by over 40%), the technology M&A share of M&A deal value has increased year over year by more than 20% and, according to McKinsey, accounts for 30% of the total deal value so far in 2022.

The US M&A market has seen several multibillion-dollar transactions announced in the technology space, including Microsoft’s USD69 billion acquisition of Activision Blizzard, Broadcom’s USD61 billion acquisition of VMWare, Elon Musk’s USD44 billion acquisition of Twitter, Adobe’s USD20 billion acquisition of Figma, and Intercontinental Exchange’s USD13 billion acquisition of Black Knight.

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 companies) (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. 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, whereas others opt for a listing in the US, as it is one of the most liquid and largest 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 of the home market, as 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 US may find it difficult to do 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 US in 2021. Consistent with the drop in IPOs, there was only one direct listing in the first half of 2022: Bright Green went public in May and immediately faced market volatility.

SPACs

During the pandemic, SPACs provided an alternative path for a company to go public. Although SPACs existed in the US 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 with very few SPAC and de-SPAC transactions completed. Some of this was due to the overall disruption of the IPO market, some due to stricter regulations of SPACs, and some due to high-profile failures of SPACs. Through the third quarter of 2022, new SPAC IPOs were down more than 80%, and the de-SPAC volume was also down by more than half, as compared to the same period in 2021. The main trend in 2022 for SPACs seems to be redemptions as many SPACs are approaching their end-of-life: 66 SPAC liquidations have been completed or announced so far this year, compared to only one in 2021, according to The Deal.

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 US, SPACs have started pursuing cross-border deals and some countries are 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.

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.

Regulatory tightening up

As deal-making in the technology industry has become more and 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 US 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.

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 contributor to address the same set of issues that a technology company going through its lifespan faces – from incorporation to early funding, venture capital rounds, and 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.

Technology M&A Conference as a follow-up to this guide

Chambers is organising a conference specifically focused on technology M&A in March 2023. Many of the issues raised in this guide will be discussed by contributors as well as leading industry participants. Please join me at the conference to hear about the most recent trends and to meet other members of the technology M&A community.