The COVID-19 Impact on Tech M&A

The COVID-19 Impact on Tech M&A

COVID-19 has slowed M&A activity in technology, media, and telecommunications (TMT). Lower valuations may, over the long-term, offer funds and Big Tech viable opportunities according to a new GlobalData report. The report emphasizes that tech M&A has declined amid COVID-19, with first quarter deal value down by 26 percent and declines across all sub-sectors. The report also lists a number of attractive targets, including chip manufacturers AMD, Xilinx, and Micron, and software companies Palo Alto Networks, Rapid7, Splunk, and Qualys. So what does the future hold? No one knows for sure, but some things to consider include:

Tech M&A in 2020
There were 150 M&A deals with values in excess of $50 million during the first quarter of 2020. The combined total value of these deals was $119.2 billion—flat compared to the end of 2019, and down 26 percent compared to the same quarter in 2019. Deal values may continue to slow.

Attractive Targets
The most attractive targets continue to be in Internet of things, artificial intelligence, healthcare, fintech, big data, cloud computing, robotics, and Internet TV. The advent of COVID-19 means that targets that can adapt to a changing world, including by enabling people to work remotely, stand to gain. Investors should consider the potential long-term ramifications of the pandemic for all acquisitions.

IT services increasingly must find ways to deliver projects to clients in lockdown. This will likely trigger a slowdown as companies scale back their IT products. Application software companies may not see much new business before the end of the year. Meanwhile, consumer electronics face rising demand, but significant global supply chain issues. When lockdown-related regulations ease and supply chains adapt, the world may be entering a recession, with fewer consumers positioned to spend on expensive electronics.

The outlook in other sectors is rosier. Telecom companies offer a critical commodity. Cloud services may also see increased demand as more consumers work from home. Even when the pandemic ends, more companies may see the value in allowing people to work from home. Zoom and Slack have seen significant valuation increases.

Many TMT companies have lost a third of their value over three months. That presents a ripe opportunity for investors. Big Tech will likely continue to dominate deals with the aim of expanding their reach.

However, businesses must do significant research and due diligence before capitalizing on lower valuations. It remains important to choose the right targets, and to consider industry trends, the effect of the pandemic, and the potential strength of the target itself. While failed investments present a significant risk, missed opportunities will become just as common, so invest wisely.