Published: July 1, 2020


With COVID-19 raging and the world's economy in freefall, tech dealmakers struggled to get anything done in Q2. The results for the first full quarter of the public health crisis-turned-economic recession showed that coronavirus basically wiped out a decade's worth of healthy growth in the multibillion-dollar tech M&A market. And, given the acute trauma in the just-finished 'corona-quarter,' recovery is looking like a long and drawn-out process.

The symptoms of the coronavirus infection have shown up in virtually every aspect of the dealmaking industry in recent months:
  • 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.
The decimation in the tech M&A market in Q2 came amid the sharpest and most severe economic contraction since the Great Depression. Whether it was restaurant seatings, airplane travel or retail sales, virtually every measure of economic activity has posted historic declines recently because of the unprecedented business shutdown to prevent the spread of the deadly coronavirus. And more economic fallout from COVID-19 appears likely.

As one grim indicator of that, consider the fact that S&P Global Ratings Research noted a week before the end of Q2 that more companies had already defaulted on loan payments in 2020 than in any of the previous three full years. More troubling, the rate is accelerating. Currently, S&P Global Ratings Research is adding seven new defaults each week, up from just two per week in the pre-coronavirus period at the start of the year.

Lasting Uptick?

Looking inside the historically downbeat Q2, some lift came by the end. Mirroring several other economic and social measures, the M&A business bottomed out in April and May, with a slight recovery in June. (Both economists and epidemiologists would nonetheless caution that 'recovery' does not equal 'recovered.')

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'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.

Undeniably, life opened up as Q2 went along. National and local authorities around the world eased some of their more restrictive shelter-in-place measures. With at least some shops open again and at least some previously homebound customers ready to shop, business started to head back to normal. As a macroeconomic indication of this, consider the fact that overall US seaborne imports in the first half of June were down just 8% compared with a 20% drop in the previous month, according to Panjiva Supply Chain Intelligence, an offering from S&P Global Market Intelligence.

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

As the quarter wound down, however, there were troubling developments in the fight against COVID-19. That was especially the case in the US, home to the largest economy on earth:
  • 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.
Most public health officials pointed to June's tentative reopening in some states as a significant contributor to the record spread of the virus there. With US-headquartered companies accounting for some two-thirds of tech acquisition activity, any setback in the fight against the coronavirus pandemic in this primary market could have severe repercussions on dealmaking.

Lightly Roughed Up

As 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.

S&P's IT sector index hit its highest-ever level in late June as tech investors essentially dismissed the impact of the largest economic downturn since World War II. Some of that enthusiasm for the sector stems from their expectation of a snapback in tech spending in the coming quarters. Bulls see a clear 'V-shaped recovery' for tech.

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.

As an investment thesis, it sounds plausible. The trouble is that it doesn't actually line up with the views of the people who write the checks. A plurality of IT buyers in a 451 Research survey said their budgets are down for the rest of the year. In the just-published 451 Research Voice of Customer: Macroeconomic Outlook, Corporate IT Spending, four of 10 respondents (41%) said they have less money to spend on IT during the second half of 2020 than they did in the coronavirus-scarred first half of the year. That's more than three times the 12% of respondents who indicated that they had bigger budgets for technology products and services.

Big Names Back Off

Wall 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.
The pullback by the group of buyers that have put up almost one of every three transactions in the M&A KnowledgeBase represents a significant challenge to the recovery in the broader tech M&A market. Our data shows that those highly visible buyers announced roughly 100 fewer acquisitions over the past three months than they would have during a typical quarter.

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.

Further, the slump in the number of deals by the publicly traded 'market makers' stands out all the more because, at first glance, some of the tech industry's biggies appeared to be busier than ever. For instance, the M&A KnowledgeBase indicates that both Apple and Microsoft printed four transactions in the past three months, an acceleration from their typical pace. Both Cisco and Intel double-dipped in Q2, with each shelling out about $1bn in one of their deals. Other brand-name tech companies that also announced a pair of acquisitions in Q2 include Facebook, VMware, NetApp and ServiceNow.

Buyouts Bottom Out

For 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.

As the coronavirus crisis ripped through their existing portfolio companies and lenders pulled back on some of the riskier loans that PE firms rely on to pay for their deals, buyout shops found themselves stymied by the double whammy. Deal volume in April and May dropped to a four-year low for consecutive months. Perhaps more significantly, the M&A KnowledgeBase shows that their share of the tech M&A market, which had been approaching one in three deals in pre-pandemic days, slumped to just one in four at the start of Q2.

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
Research Vice President

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
Research Director

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
Principal Analyst

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.

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