- Announced deal value of only $34bn during the just-completed quarter stands as the lowest quarterly level in 451 Research's M&A Knowledgebase since Q1 2010.
- Overall spending on transactions announced in the three-month period (April-June) came up short compared with even a typical single month in recent years.
- The number of tech acquisitions announced around the world in Q2 dropped almost 20% from recent quarterly deal volume.
- The deals that did get done nonetheless reflected the broader recessionary environment, with our data showing overall acquisition valuations so far in 2020 plunging to a seven-year low.
In terms of tech acquisition spending, April and May stand as the lowest back-to-back months since early 2009. Indeed, there was a single transaction in June (Just Eat Takeaway.com's $7.1bn purchase of Grubhub) that matched the total value of all tech acquisitions announced around the world for the entire two previous months.
Similarly, tech acquirers got back to business, with the value of deals announced in June in the M&A KnowledgeBase coming in almost four times higher than the combined spending of April-May. June was still a long way from normal, however. Our data indicates that buyers in the just-concluded month handed out $26bn on tech transactions, compared with a monthly average of closer to $45bn over the past two years.
A Poor Prognosis
- On the final weekend of June, the number of worldwide COVID-19 cases topped 10 million, with the majority of the new cases coming from the US, according to Johns Hopkins University.
- The US reported a record 40,0000 new infections each day at the end of June. The unprecedented increase pushed the cumulative cases in the country to more than 2.5 million – a tenfold increase from the start of Q2.
- Confirmed COVID-19 infections in California, which is the single busiest market for tech acquisitions, increased at twice the rate of the US overall in Q2.
Lightly Roughed UpAs an industry, tech hasn't been hit nearly as hard by coronavirus as other sectors of the economy. In fact, the pandemic has proved an accelerant for several tech vendors that fit the new work-from-home (WFH) reality. (On that note, far from being temporary, remote work appears to be the plan for an increasing number of businesses, even after the pandemic passes. In the June installment of a special 451 Research Digital Pulse: Coronavirus Flash Survey, two-thirds (67%) of organizations we surveyed indicated that they expect to extend WFH 'long term or permanently.')
Paced by a stunning rise in tech stocks, the S&P 500 Index soared 23% in Q2, according to S&P Global Market Intelligence. Tech names in the index tacked on an additional 10 percentage points in the quarter, which more than made up for the decline in Q1. The S&P Information Technology (IT) sector has (almost unbelievably) posted a 12% gain so far in 2020, while the broad market S&P 500 Index is down just 5% this year.
The thinking among these Wall Streeters is that companies have been focusing on the tech needed to meet the immediate demands of their remote workforce, such as collaboration software and security for distributed offices. As the threat of COVID-19 recedes and work 'normalizes' in the coming quarters, these investors expect IT buyers to boost their overall spending as they catch up on projects they deferred because of the pandemic.
Big Names Back OffWall Street may be betting heavily on the prospects of tech vendors right now, but the tech vendors themselves don't universally share that confidence. Like companies across all industries, publicly traded tech providers have withdrawn guidance for future financial performance at a record pace in 2020. Expect even more of this as results from the April-June quarter roll in over the next month or so.
In another sign that COVID-19 has undermined the fundamental assumptions needed to run their business, mainstay tech vendors have sharply curtailed their inherently risky pursuits of other companies:
- Companies on the NYSE and Nasdaq in Q2 announced the fewest tech acquisitions since Q1 2009, according to the M&A KnowledgeBase.
- The 135 tech purchases by US-listed vendors in the April-June period is about 40% fewer than the typical quarter. The decline in the key buying group was twice as steep as the nearly 20% overall drop in the number of tech transactions in Q2.
This decline narrows the options, for instance, for private capital investors such as private equity (PE) shops and venture capital outfits. Those firms rely on long-standing public tech vendors – with their well-established acquisition programs, along with the capital to finance deals – to provide at least some of the exits for their investments.
Buyouts Bottom OutFor financial acquirers, a full boom-bust cycle appears to have played out in just Q2. Coming into the coronavirus pandemic, PE firms had been steadily accelerating their dealmaking, with some of the more active firms averaging a head-spinning two to three transactions each month. Including both large platform deals and smaller bolt-on acquisitions, buyout shops have been behind almost one of every three tech transactions in recent years, according to our numbers.
These deal machines didn't stay unplugged for long. As business risk from COVID-19 began to dissipate and the leveraged loan market eased back open in late May/early June, PE firms once again found a way to put their record cash holdings to work in the tech industry. But, reflecting the deteriorated economic environment, they necessarily invested more conservatively.
For instance, the M&A KnowledgeBase lists just a single purchase of a US-listed company by a buyout shop valued at more than $1bn in Q2. In recent years, PE firms have been reliably averaging three to four significant take-privates each quarter. More broadly, they scaled back other acquisition strategies they used prolifically before the pandemic, often shaving a zero or two off the purchase check they write. Put it altogether, and our data indicates that PE spending, which had tripled over the past decade, is off to its slowest start so far in 2020 compared with any year since 2015.
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.