As the turbulence of 2022’s tech downturn fades into memory, the 2024 software M&A landscape is showing signs of resilience and recovery. However, it’s not without challenges. While deal activity is on the rise, bolstered by renewed investor confidence and strategic realignments, the market still contends with several headwinds. These include lingering economic uncertainties, shifting regulatory landscapes, and the evolving nature of technology itself. The rebound is evident, but the road ahead requires navigating a complex environment where opportunities and risks are closely intertwined.
Here are 5 key trends in Software M&A in 2024:
1. Recovery in M&A Activity
- Deal Volume and Value: After a dip in 2023, the total deal volume in 2024 is projected to grow by approximately 15-20%, according to industry reports. This resurgence is fueled by companies looking to enhance their digital capabilities, enter new markets, and consolidate their positions in existing ones.
- Valuations. One of the impacts of the techwreck was a rapid divergence in buyer/ seller valuation expectations. The gap appears to have substantially closed, buyers looking for ‘extreme value’ have found themselves missing out, and sellers expectations appear to have reverted back to metrics in line with long-run benchmarks.
- High-Value Deals: Mega-deals (valued over $10 billion) are making a comeback, particularly in sectors like enterprise software, cloud computing, and cybersecurity. In the first half of 2024 alone, several deals have surpassed the $5 billion mark, indicating robust investor confidence.
2. Increasingly Complex Regulatory Environment
- Regulatory Scrutiny: The regulatory landscape is increasingly stringent, especially for tech-related deals. In the U.S., the FTC and DOJ are more aggressively scrutinizing deals for anti-competitive practices. Globally, the rise of economic nationalism has led to more deals being blocked or delayed. For instance, in the EU, over 25% of proposed tech mergers faced significant delays or were abandoned due to regulatory hurdles in 2024.
- Cross-Border Challenges: Cross-border M&A deals are particularly challenging, with 40% of such deals in the tech sector facing extended review processes. Governments are increasingly wary of foreign acquisitions, particularly in sensitive sectors like AI and cybersecurity.
3. Focus on acquiring Technology Capabilities
- Tech-Driven M&A: Technology capability acquisition is one of the primary motivations driving M&A in 2024. Companies are acquiring firms to gain access to cutting-edge technologies, with a strong focus on artificial intelligence (AI), machine learning (ML), and cloud infrastructure. According to PwC, over 60% of M&A deals in 2024 are motivated by the need to acquire new technology or digital capabilities.
- AI and Automation: The integration of AI and automation technologies is a key trend, with 35% of tech M&A deals focusing on companies specializing in AI, robotics, and automation. This trend is expected to continue as industries like finance, healthcare, and manufacturing seek to enhance efficiency through technology.
4. Private Equity’s Growing Role
- PE Firms in Tech M&A: Private equity (PE) firms are increasingly active in the software M&A space. In 2024, PE firms are expected to account for nearly 40% of all tech-related M&A deals. This is up from 30% in 2023, driven by the vast amounts of dry powder (uninvested capital) available and the need to deploy it in high-growth areas.
- Focus on Distressed Assets: PE firms are also eyeing distressed assets, especially in sectors hit hard by economic downturns or rapid technological change. This is leading to a rise in opportunistic acquisitions, where PE firms acquire struggling tech companies at lower valuations.
5. Macroeconomic Headwinds
- Economic Uncertainty: Despite the overall growth in M&A activity, macroeconomic factors like inflation, rising interest rates, and geopolitical instability are influencing deal strategies. In particular, there’s a shift towards acquiring companies in recession-resistant industries, such as healthcare IT and cloud services, which are less likely to be impacted by economic downturns.
- Interest Rate Impact: The rising interest rates are a double-edged sword. While they increase the cost of borrowing, making some deals more expensive, they also create opportunities for PE firms and corporations with strong balance sheets to acquire assets at more attractive valuations.
Statistical Highlights:
- M&A Value Growth: Global M&A activity in 2024 is expected to reach approximately $4.7 trillion, up from $3.9 trillion in 2023, with technology-related deals comprising around 25% of the total.
- Cross-Border Deals: Cross-border M&A activity is projected to account for 40% of total deal value in 2024, despite regulatory challenges.
- PE Dominance: PE-driven deals could reach a record high in 2024, potentially accounting for nearly 50% of total global deal value in the software and technology sector.
Overall, 2024 is shaping up to be a good year for software M&A, of you are interested in learning more about the state of the M&A market or wishing to discuss plans for your own business, please contact one of the Eaton Square
