Coronavirus, which first emerged in China in late December but only really got recognized in the West in February, started as an alarming public health concern and has subsequently metastasized into a dire threat to economic health. The worst viral outbreak in more than a generation – along with the subsequent measures to halt the spread of the deadly virus – ended Wall Street's longest-running bull market, plunged the credit market into a quarantine of its own, and wiped out millions of jobs.
The Worst is Yet to Come
That ended abruptly as the pandemic panic took hold. The M&A KnowledgeBase shows spending on tech transactions in Q1's final month plummeted two-thirds compared with the first two months, declining to the lowest monthly total since 2013.
At the start of the VotE survey period (March 10-11), roughly four of 10 respondents thought their businesses could run 'indefinitely' without experiencing a major disruption, such as not being able to pay bills or deliver services. A week later, just half the number (21%) thought their businesses would get through the coronavirus pandemic unscathed. (For context, the number of confirmed COVID-19 cases worldwide tracked by Johns Hopkins University doubled during that mid-March survey period. Ominously, the number of cases more than tripled in the final half of the month.)
Shopping for TP and Bleach
Similarly unprecedented is the $2 trillion 'stimulus package' that Congress and President Trump rushed to pass at the end of March. The package, which is about twice the amount that Washington doled out in support of the US economy during the Credit Crisis, brings a mix of direct cash payments, newly available loans and other fiscal measures designed to keep businesses and households afloat until the US economy can emerge from its medically induced coma. Yet even this historic amount of aid may not be enough. Many economists and legislators are already roughing out plans for a follow-up package that could also be measured in the trillions of dollars.
The Breakdown of Certainty
By our calculations, the average tech deal in 2019 went off at a record 2.7 times trailing sales, a full turn higher than the start of the decade. M&A multiples across all of tech have ticked higher for each of the previous three years, according to the M&A KnowledgeBase.
As dealmakers are discovering right now, it's extremely difficult to price in a pandemic. What happens to those escalating valuations when they run into the more-powerful forces to 'flatten the curve?' How do you adjust for an anomalous event like a pandemic? Is it even possible to separate the epidemiological from the economic?
These are questions that will take months or even much longer to answer fully. But the early indications are unambiguous: Tech M&A prices are coming down. At just 2x sales, the average multiple in Q1 basically matches the level that shell-shocked buyers were paying when they emerged from the Credit Crisis.
The Way Forward
From the broader M&A market perspective, hunkered-down dealmakers are currently spending down the pipeline. And because of the uncertainty swirling around the globe, the pipeline isn't getting replenished. There are prints now, but not much coming behind them. Certainly not any deals of size, whether large-scale transformative transactions or stratospherically priced bets on unproven unicorns.
As to how long we'll be doing deals in 'crisis mode,' a look back at last decade's financial pandemic, the Great Recession, provides at least a rough timeline for the lag between economic/financial calamities and when they show up in tech M&A activity. Most of the confidence-shattering events of the Credit Crisis – such as the bankruptcy of Lehman Brothers and the collapse of AIG – took place in 2008. The S&P 500 Index plummeted nearly 40% that year, erasing trillions of dollars of value from stocks around the globe.
Yet for most investors and businesses, the worst economic downturn since the Great Depression turned upward in relatively short order. The recession officially ended in 2009, and Wall Street's bull market began its historic gallop. The S&P 500 returned about 25% in 2009, kicking off a nearly uninterrupted rise that saw the index almost quadruple over the next decade.
Brenon Daly oversees the financial analysis of 451 Research's Market Insight and KnowledgeBase products, having covered more than a quarter-trillion dollars' worth of deal flow for both national publications and research firms.
Sheryl Kingstone leads 451 Research’s coverage for Customer Experience & Commerce, which covers the many aspects of how customer experience is a catalyst for digital transformation. She oversees the company’s coverage of a variety of customer experience software markets spanning ad tech, marketing, sales, commerce and service.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.