Competition to heat up in tech M&A

Thursday, 27 May, 2021

Competition to heat up in tech M&A

By 2022, global mergers and acquisitions (M&A) activity involving technology providers will surpass 2018 highs, according to Gartner, Inc.

The tech M&A activity was briefly impacted by the onset of the pandemic, but it quickly rebounded into 2021 as the economy began to recover.

“Market conditions for deal making will continue to improve as volatility stemming from COVID-19 subsides,” said Max Azaham, senior research director at Gartner.

“Tech CEOs pursuing acquisitions should anticipate increased competition for targets and take steps to gain advantages over other acquirers to earn seller acceptance.”

Financial acquisitions

There was increasing interest in tech provider acquisitions from financial services companies, predominantly private equity firms. Throughout 2020, financial acquisitions of software providers represented over half of all such acquisitions. Despite software already being the largest category, financial acquirers’ increasing interest should drive higher activity in 2021.

The largest M&A activity gains in the second half of 2020 involved financial acquisition of communications providers (93% growth), and acquisitions of services providers by financial acquirers were 30% higher in the fourth quarter of 2020, compared to the prior two years’ average.

Consolidation trends

Consolidation of providers with high degrees of overlap increased by 65% and 40% in services and software markets, respectively, in the second half or 2020, compared to the average number of M&A transactions in 2018 and 2019 (transactions of over $1 billion in value were excluded).

This suggests tech CEOs must be prepared for competitive landscapes where key competitors merge, especially among service providers.

“Instead of making acquisitions or being acquired, tech CEOs will start to consider partnerships and ecosystems to level the playing field against larger companies resulting from consolidation in their markets,” Azaham said.

Impact on enterprise customers

The expected uptick in M&A activity throughout this year cannot leave existing customers behind. Successful acquirers will consider the implications for end users and make customer experience (CX) a top priority across each stage of the M&A life cycle.

CIO customers of vendors undergoing an integration expect minimal service disruptions and transparent communications on product, pricing and support changes, if any. “Without empathy and a deep understanding of what motivates the existing customer base, organisations risk acquiring a customer base that will churn following deal closure,” Azaham said.

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