Boardroom IntelligenceCategory

The Return of the Strategic Buyer in Tech M&A

By Jon Gegenheimer
3 min read

Technology capital markets have been in a transaction winter since the end of 2021, with many buyers and sellers frozen in place and substantially reduced transaction volume. That deep freeze appears to be ending and the field of prospective buyers is expanding.

For the first time in several years, private equity firms and other financial players may not be the lead protagonists in technology M&A. Strategic buyers have reawakened, which creates expanded opportunities for sellers to achieve optimized value, particularly if they prepare thoroughly and target the market correctly.

The relative quiet of strategic acquirors has been much discussed, particularly since their cash balances have grown steadily since the end of the Global Financial Crisis. Higher interest rates also gave strategic acquirors a pronounced cost of capital advantage relative to other types of buyers. At the same time, valuation multiples declined for many otherwise healthy and attractive technology companies.

This should have led to an uptick in strategic acquiror activity as they looked to deepen and extend capabilities and capitalize on high-value strategic themes. At a minimum, one would have expected more large consolidations as incumbent strategics joined forces, usually by exchanging their stock.

Despite these catalysts, strategic acquirors remained generally dormant for almost two years, due at least in part to enduring wide “bid / ask spreads” born of the extraordinary valuations seen in the runup to and immediate aftermath of the COVID outbreak. Boards of directors – cautious by nature – still regarded most potential acquisitions as too expensive. With respect to issuing stock consideration, they were unwilling to commit to the dilution that would have resulted from issuing shares at challenged valuation levels, even though the valuations of target companies were often even more depressed.  

Then, in late 2023, the ice broke. Deals involving strategic buyers started to flow, driven by growing equity values, restored investor enthusiasm for growth and extension, the onslaught of AI adoption, and companies' willingness to test an evolving regulatory environment.

Last September, Cisco announced its intent to acquire the cybersecurity and analytics company Splunk in a $28 billion cash deal. Among other ambitions detailed in its announcement, Cisco argued that the combination would empower it to use generative AI to simplify complex tools so that more non-technical people can use them.  

In January, Hewlett Packard Enterprise (HPE) announced its all-cash $14 billion acquisition of the networking gear maker Juniper. It was a classic tech infrastructure consolidation that HPE said would accelerate AI-driven innovation. A few days later, the chip design software maker Synopsys said it would buy Ansys in a $35 billion cash-and-stock deal, snapping up the maker of software used in creating products from airplanes to tennis rackets.

On February 15th, the Japanese chipmaker Renesas Electronics said it would buy the California electronics design firm Altium for $5.9 billion in cash, as Renesas is looking to offer digital device design to customers.

These headline-grabbing transaction announcements should signal to prospective acquirors of all stripes that strategic-led Tech M&A is back.

According to Standard & Poor’s, the total value of all M&A deals in the first quarter of 2024 was the highest since the second quarter of 2022, when interest rates were still low and digitization was driving dealmaking. In the first three months of this year, strategic buyers spent more than $107 billion on acquisitions. By contrast, the ratio of financial firm deals to all deals has declined from 38% in the first quarter of 2021 to 26% in the first three months of 2024.

The expanding field of buyers has immediate implications for how a potential seller should position itself to find a partner, including:

  • Temper your growth goals and emphasize your current – or very near-term path – to profitability. For over a decade, there has been a strong—some would say excessive – emphasis on growth at all costs. While forward growth expectations remain the most correlated performance metric to valuation outcomes, margins and profits matter again.
  • Emphasize the underlying economics of the sales motion and the embedded efficiency opportunity that accompanies scale. 
  • Understand how investors value your potential strategic acquirers and fit your narrative accordingly to develop internal business unit champions who are willing and prepared to spell out the value proposition to their decision-makers.
  • Know who you are and what kind of company you will be once you mature. Buyers don’t want to have to figure out your story. Do it for them.

Jefferies expects continued growth in strategic buyer M&A as the first companies entering the capital markets report successful outcomes. However, the increase may be gradual as strategic buyers seek clarity on the evolving valuation, regulatory, and interest rate environments.

Another factor looming large for the back half of 2024 is the U.S. presidential election, which historically does not meaningfully influence dealmaking outside of the largest transactions. However, President Biden and former President Trump present starkly different perspectives on regulation and the Federal Reserve, and some dealmakers may put the brakes on transactions until after the votes are counted.

Despite these uncertainties, the strategic buyer appears to be out of hibernation, which bodes well for sellers better positioned to optimize exit valuations against a more comprehensive set of strategic and financial acquirors.