Technology M&A (2023)

Alexander Zharskiy
ALRUD, Moscow
azharskiy@alrud.com

Report on a session at the 20th Annual International Mergers & Acquisitions Conference in New York

6 June 2023

Session chairs

Rachael Bassil Gilbert + Tobin, Sydney

Anthony Vernace Simpson Thacher & Bartlett, New York

Speakers

Olivier Assant Bredin Prat, Paris

Mziwandile Ezra Clavis Davids Bowmans, Johannesburg

Zia Mody  AZB & Partners, Mumbai

David Tadmor Arnon Tadmor-Levy, Tel Aviv

Brief overview

Technology transactions and technology itself have been a huge factor in global M&A and corporate law and governance, over the last few years. During this panel discussion, speakers broadly discussed technology M&A, including:

• the latest deals, complications and lessons learned;
• the impact of macro trends on tech M&A; and
• the impact of technology in M&A, including cybersecurity, privacy and foreign investment reviews of technology transactions.

Tech M&A trends

The panel began by highlighting the fact that the tech industry has been the most active sector for transactions over the past years. The majority of M&A deals were in the tech sector, accounting for approximately one-quarter of both deal volume and value (globally, there were 10,937 transactions valued at $1.125bn in 2022, according to PwC). The multiples in the tech sector have risen from approximately 13 to 14 times the earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2018–2019, to 16 to 18 times in 2020 and 2021.

Following this introduction, a few specific countries were discussed in more detail.

• France: took first place among the European Union's tech ecosystems for startup investment in the second quarter of 2022, at €3.2bn;
• India: in 2021, the IT/information technology enabled services (ITES) sector contributed 20 per cent of the total deal value and 16 per cent of the total deal volume in India. In 2022, the IT/ITES sector remained the second most active sector and contributed 21 per cent of the total deal value in India; and
• Israel: the tech sector contributes 16 per cent of gross domestic product (GDP), 45 per cent of GDP growth, 55 per cent of exports and 34 per cent of employee income tax.

It was mentioned that, despite the high numbers, the new global context since mid-2022 has caused some issues for the tech sector, namely:

• high interest rates;
• more expensive capital;
• the global macro environment; and
• fewer unicorns created in 2022 than in the 2021 boom (the United States led in terms of number of unicorn companies, with China second and India third).

The likely consequences are a drop in valuation, but there are also opportunities for traditional M&A and consolidation between scale-ups.

Global tech M&A activity

This is clearly seen in the deal volume (mm), which was:

• $1,183,345 (the highest level over the past years) in 2021;
• $786,515 in 2022; and
• $158,222 in 2023 (to 31 May 2023).

Down rounds

The panel identified and discussed the increase of ‘down rounds’ (ie, when a financing round takes place at a value that is less than the previous round), given decreasing values. The panel raised concern about lack of liquidity: the founders of tech companies are raising finance at significantly lower valuations (a reduction of valuation multiples by 50–70 per cent). Further, the panelists discussed the consequences of a down round and possible reactions to decreasing values.

Foreign investments in the tech sector

The session continued with a discussion of the continued trend of increased monitoring and control of foreign investment in the tech sector (including cybersecurity, artificial intelligence (AI), robotics, additive manufacturing, semiconductors, quantum technologies, energy storage and biotechnologies) limiting the ability of multinationals to acquire tech companies (eg, prolonged acquisition processes and potential rejections). The speakers discussed the recent manifestation of this trend in the EU, France, Israel and South Africa.

Killer acquisitions in the tech sector

The panel next addressed the subject of killer acquisitions. A few examples were provided in relation to the EU. It was pointed out that the new thresholds in terms of value of the transaction were established in Germany and Austria — for example, Apple/Shazam was caught by the new Austrian threshold. In addition, reviews of mergers upon the request of the merger control authority of a Member State are taking place even if their own jurisdictional thresholds are not reached (Article 22 of the EU Merger Regulation) – for example, Illumina/Grail. The panel also discussed the possible recourse to abuse of dominant position theory in relation to killer acquisitions, even where merger control clearance is not required.

Regarding the situation in India, the Competition Commission of India (CCI) has sought to bring in its notification ambit low value global deals if a target business has substantial business operations in India. It is also proposing to link penalties to global turnover, but these amendments are yet to come into force.

Data issues continue to be relevant

The panelists further touched on the topic of data issues. They agreed that data is a key asset in M&A deals with several implications, particularly with respect to anti-competitive practices and data privacy rules.

European regulators closely watch transactions on data-intensive markets. Examples include:

• the acquisition of Fitbit by Google (2020): the EU Commission based its assessment on the parties being able to lawfully combine their databases (with the approval of the deal due to Google’s commitments); and
• Acquisition of Kustomer by Meta (2022): an investigation by the EU Commission took place given the significant amount of data that would be available to Facebook for personalisation of the ads it displays (approval of the deal due to Meta's commitments).

Data privacy rules include the importance of the due diligence of the IT security systems, compliance of the target, use of the data acquired post-acquisition and transfer of personal data of the target outside its country/region of origin post-acquisition. The panelists next discussed in more detail the related cases in practice:

• the UK data protection authority fined Marriott £18.4 million following the hacking of Starwood, a company acquired by Marriott, noting the lack of due diligence, in 2020;
• the Irish data protection authority fined WhatsApp €225 million for unlawful sharing of personal data with Facebook companies in 2021; and
• the Irish data protection authority fined Meta €12 billion for unlawful transfers of personal data outside the European Union in 2023.

Due diligence

The session concluded with a group discussion of due diligence problems. It was mentioned that, due to the legal risks associated with tech companies, due diligence is crucial and requires more resources and time. The increasing number of regulations that apply to tech companies require extensive compliance audits; in addition, reviewing companies’ legal and regulatory compliance takes longer and requires specific IP, data, financial and regulatory expertise. Reciprocal due diligence may also take place (eg, in India). In conclusion, the panelists spoke about emerging changes in tech due diligence and representations and warranties (R&W) insurance in Israeli tech transactions.

Where does tech M&A go from here?

Finally, the panelists debated possible scenarios and the future development of technology transactions.