Big Tech M&A Stalled As Regulators Crack Down
The tech M&A landscape has shifted dramatically in recent years, with a notable decline in deal activity fueled by heightened regulatory scrutiny and a focus on shareholder returns. While private equity continues to be a driving force in the market, large tech companies are facing significant hurdles in their pursuit of acquisitions. This has led to a "new world of tech M&A," according to industry experts, where deals are either being abandoned or structured in ways that minimize regulatory risk.
Key Takeaways
- The Biden administration’s antitrust crackdown on Big Tech has severely impacted deal flow.
- The FTC under Lina Khan has been particularly active, blocking deals and scrutinizing even smaller acquisitions.
- Big Tech companies are resorting to acquihires, a strategy that involves hiring talented teams from startups without actually acquiring the companies.
- Private equity continues to drive M&A activity, focusing on deals with clear shareholder value and minimal regulatory risk.
- The future of tech M&A remains uncertain, with both parties in the upcoming presidential election offering little clarity on their stance toward antitrust reform.
A Shift From Traditional M&A
Since 2021, tech M&A volume has plummeted, dropping from a peak of $1.5 trillion to just $544 billion in 2023. This trend has continued into 2024, with total deal value currently sitting at $465 billion. This drastic decline can be attributed to several factors, including increased regulatory scrutiny, heightened concerns about antitrust implications, and a broader economic slowdown.
The Rise of Acquihires
Big Tech companies are increasingly turning to acquihires, a strategy where they hire the entire team of a startup rather than purchasing the company outright. This approach allows them to access specific talent and technology while mitigating regulatory risks. Google, for instance, adopted this strategy in its recent deal with Character.AI, a generative AI startup. Instead of an acquisition, Google opted for a licensing deal, keeping the startup alive while gaining access to its technology.
This trend is not limited to Google. Amazon has employed a similar tactic with Covariant and Adept, startups specializing in AI for robots. While the FTC has expressed some interest in these deals, they haven’t been subjected to the same level of scrutiny as traditional acquisitions.
Private Equity: A Bright Spot in M&A
Private equity firms have emerged as a dominant force in the tech M&A market, particularly for mid-market deals. They are less averse to regulatory scrutiny, focusing instead on deals that offer immediate shareholder value and clear potential for growth.
The Importance of Synergies and Shareholder Value
Companies like Hewlett Packard Enterprise (HPE) are prioritizing deals that deliver synergistic potential and enhance shareholder returns. HPE’s recent $14 billion acquisition of Juniper, a networking hardware company, was carefully chosen to maximize shareholder value and ensure immediate profitability.
Similarly, Salesforce, known for its cloud software solutions, recently purchased Own, a startup, for $1.9 billion, arguing the deal would boost its free cash flow within the second year.
Both HPE and Salesforce are highlighting the need for strong financial returns and are willing to take on more risk when it comes to regulatory approval. This approach is a stark contrast to Big Tech companies, which are navigating a more challenging environment due to the regulatory crackdown.
Uncertain Future: A Crossroads for Tech M&A
The future of tech M&A remains uncertain, with the outcome of the upcoming presidential election potentially altering the regulatory landscape significantly.
The Role of Presidential Elections
On the Republican side, Sen. JD Vance, Donald Trump’s running mate, supports stricter regulation of tech giants. This stance aligns with the current administration’s approach. However, Trump’s potential return to the White House might see a shift in focus towards national security concerns when it comes to tech acquisitions, potentially leading to fewer regulatory hurdles.
Meanwhile, the Democratic candidate, Vice President Kamala Harris, is likely to continue the Biden administration’s stance on antitrust enforcement, posing significant challenges for Big Tech M&A.
The European Perspective
Europe has taken an equally aggressive approach to antitrust regulations, particularly concerning data privacy and competition. This stance contributed to Adobe’s decision to abandon its $20 billion acquisition of Figma, which ultimately went on to secure a valuation of $12.5 billion in a tender offer.
The European perspective on antitrust enforcement is a significant factor for companies considering large acquisitions.
A Focus on the Future
The current regulatory landscape has made it difficult for companies to acquire large targets, forcing them to adopt new strategies such as acquihires or pursue deals with a clear path to shareholder value. The future of tech M&A remains uncertain, as both sides in the upcoming presidential election offer different visions for regulation, and Europe remains committed to its robust antitrust enforcement.
The outcome of the election and the future of antitrust reform will determine if the current trend of stalled M&A for Big Tech companies continues or if there’s a shift in approach.
