Technology continued to drive M&A activity in 2022 despite the odds being stacked against the sector

The value of 2,309 deals targeting
the US tech sector in 2022

There were 2,309 technology M&A transactions in 2022, worth US$546.6 billion—down 11 percent and 32 percent year-on-year, respectively, but still the second-highest total of any year on Mergermarket record measured by either metric, after the outlier year of 2021.

Five of the top-ten largest deals of the year belonged to the sector. The targets were video game developer Activision Blizzard, cloud computing company VMWare, social media giant Twitter, cloud-based design tool business Figma and cloud virtualization business Citrix Systems. These five deals alone were worth US$225 billion.

Much of the continued technology M&A activity is due to private equity (PE) taking full advantage of a buying opportunity. The pandemic supercharged the technology sector, as remote working pushed many businesses into a digital-only mentality. As a result, valuations and M&A (including de-SPAC deals) soared. By 2022, however, this trend had begun to show signs of slowing.

The sector is also particularly sensitive to a higher interest rate environment. Investment in a high-growth technology company can be speculative, with investors often using a discounted rate to calculate the present value of an asset's future cash flows. Higher interest rates increase that discount.

Even in the case of highly cash-generative technology companies with proven earnings margins, the rotation out of cyclical stocks into value stocks brought multiples back down to earth. Tech-focused PE funds such as Vista Equity Partners and Thoma Bravo were especially active in 2022, making the most of trampled equity prices to take large companies private.

Technology can reduce costs for struggling companies in times of economic uncertainty. This should continue to fuel deal activity, particularly as going public will no longer be an option for most businesses until there is an assured improvement in market confidence, and some will likely end up in distress. In the short term, technology companies may be less acquisitive due to ongoing headwinds, including higher interest rates, market uncertainty and lower valuations for their shares. However, PE still has ample dry powder at the ready and a strong appetite for what may soon be viewed as discounted assets. Do not be surprised if technology maintains its leading position in 2023.

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