This year was a record-breaking year with global M&A activity hitting an all-time high in the first half of 2021, despite the global COVID-19-restrictions having an impact on the economy. In Europe, the deal value increased with 111% (compared to 2020) to nearly EUR 500 billion. In the US, the deal value amounting to USD 4.3 trillion broke the 14-year-old record set back in 2007. With Technology, Media and Telecom (TMT) and Healthcare being the undisputed champions when it comes to deal making. The question is whether this will hold on or whether the good times will come to an end soon.
Although the lockdown restrictions have been tightened (again) in Europe and the new Omicron mutation might have consequences, based on the earlier resilience of dealmakers and the ongoing availability of capital in the market, it is not expected that M&A activity will decrease the coming year. Having said that, this does not mean that there will be no hurdles in deal making in 2022.
1. Spotlight on Tech
Even before COVID-19, the digitalization of the economy was a major topic. However, as General Counsels have experienced themselves, the pandemic truly accelerated the acceptance of technology. This resulted in a significant boom in tech M&A. Consumers quickly adopted digital tools that contribute to the convenience of their – home bound – daily life’s and companies are utilizing tech solutions to increase operational efficiency and decision making.
Corporates, and specifically tech companies, are adjusting their M&A strategies to position themselves for future revenue growth by focusing on targets in the field of business resilience, digital technology alignment and upscaling. Having said that, where should a General Counsel focus on next year?
If we look back at the past 18 months of deal making, we see that software as a service (SaaS) deals have lead the way in the tech sector. However, we also see momentum building for deep tech as companies focus on capability-building and value creation. Deep tech includes, amongst others, artificial intelligence (AI), blockchain, augmented reality and virtual reality, robotics, automated driving and quantum computing. Although many of these technologies are still making their way to commercialization, they all hold the promise to shape our future at a very fast pace.
2. Tech Outlook 2022
Driven by the further evaluation of deep tech and the promises this brings we see significant opportunities in the following fields:
Blockchain
Besides the ongoing developments in institutional acceptance of cryptocurrency, blockchain technology is expected to utilize significant additional use cases in the future resulting in more funding and M&A activity. With regard to crypto, taking into account the fast pace by which dedicated crypto investments funds come to life and the ongoing recognition of digital assets as an attractive asset class, we expect the crypto industry, especially in the field of decentralized finance (DeFi) and Metaverse, to be an hotspot for M&A in 2022.
Cloud technology
Covid has spurred the development of remote working, which is presumably here to stay. Cloud technology enables this. Together with its low usage costs, advanced technology solutions, its wide usage and allowance to scale up business operations, this subsector will likely rise in the near-term.
Disruptive tech
As we have seen in retail (Amazon and Alibaba) and the automotive industry (Tesla and Rivian) tech can be a big disruptor of highly concentrated industries. Technology will be used to lower costs, grow revenues, and redraw competitive boundaries. Examples of subsectors landscaping the future are Artificial Intelligence, Fintech and Big Data. Although more time is needed for these business to be fully up to speed and to be widely and reliably applied, it is worth keeping an eye on them.
3. Challenges and focus points
Regulatory scrutiny
Driven by protectionism, tech is facing some headwind in the form of a stricter regulatory environment and the public sentiment to protect critical technology and data. An example hereof is the EU Foreign Direct Investment Screening Regulation (Regulation (EU) 2019/452), pursuant to which members states have tightened their foreign investment regimes requiring filing and potentially clearance of transactions falling into the respective scope. More restrictions on national and supranational level are expected in the coming years. When structuring an M&A deal, satisfying such requirements within the applicable timelines should be kept in mind by General Counsels.
ESG
Environmental, social, and governance (ESG) concern are receiving more and more attention. Although the tech sector has traditionally played a pioneering role, ESG concerns are still significant in the field of sustainability, energy consumption, ethics and data privacy. We have seen that the regulatory framework around ESG is tightening, for instance by the implementation of the European Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088), and we expect more scrutiny in 2022. General Counsels should include ESG on the agenda for assessing their next target and we recommend making this an integral part of the due diligence process. .
4. Conclusion
Although the ongoing pandemic and new mutations will create uncertainty in the near future and despite increasing protectionism we are optimistic about the potential for tech M&A that lies ahead for 2022 and beyond. To be successful in the fast changing tech environment, your company will be challenged to be bold and reinvent itself over and over. General Counsels adopting a value adding M&A strategy will certainly help to stay ahead of the competition.