Tech M&A was at a relative standstill for nearly a year, but the gears are starting to move again.
That said, the vaunted tech megadeals investors have gotten used to seeing, such as Microsoft's (MSFT) fraught $69 billion acquisition agreement with Activision Blizzard (ATVI), will be few and far between due to increased regulatory scrutiny and broader macroeconomic issues.
"It's harder [to do megadeals] not just because of regulatory scrutiny — it's also harder because financing is a lot more challenging, along with the market," S&P Global Market Intelligence M&A analyst Melissa Incera told Yahoo Finance. "The market is penalizing deals that are too speculative, where it's perceived that buyers are overpaying for value."
"I think we're going to see massive deals happening with a lot less frequency moving forward," Incera added.
While the overall dealmaking environment has fundamentally shifted, it's a good time to be looking at deals, said Yieldstreet CEO Michael Weisz, who has done a number of deals and is currently looking for acquisitions at the digital investing platform.
"A year-and-a-half, two years ago, M&A conversations were very difficult because it was so easy to raise capital, so leaders and CEOs all thought they would be tomorrow's unicorns and billionaires," said Weisz. "It was very hard to have a pragmatic conversation then, but it has now become a really interesting time to gain capabilities and become a dominant player in the space through both organic and acquisitive growth."
Weisz said he expects to see consolidation among online investing platforms. There's appetite for deals more generally too, according to Incera. They just are far more likely to be add-on acquisitions than megamergers.
"People have characterized this year as 'the year of the add-on,'" said Incera. "There's a lot of competition for high-quality companies at the moment, despite the fact there are all these forces pressuring M&A downward."
Deal-ready sectors to watch
So, what sectors are ripe for M&A deals?
Cybersecurity is one of the big ones — it's fragmented, mission-critical, and companies in the sector are less likely to go public or confront profound antitrust concerns.
"If you look at the IPO pipeline ... the reality is that many companies are going to sell before they go public in cybersecurity," Houlihan Lokey managing director Keith Skirbe said. "Historically, we’ve had at most five IPOs in cybersecurity in any given year, with 2021 being the last such year. Most of these companies are selling before they go public, so if you look at the IPO pipeline, there's a number of companies that have raised a lot of capital and have some pretty significant valuations."
Two key examples of those types of late-stage companies include cybersecurity monitoring company Arctic Wolf and zero trust security company Illumio.
M&A conversations in cybersecurity have picked up in recent weeks, said Skirbe, who worked on Cisco's (CSCO) acquisition of Armorblox, one of the most notable tech deals of this year.
"We've been starting to see things pick up," he said. "So I suspect that we're going to see a little bit of an uptick in higher quality deals coming to market in the back half of this year and in the first quarter of next year."
Joe Watson, managing director at Solomon Partners, has also seen M&A conversations move forward in recent weeks.
"The conversations we've had around potential assets going to market have solidified," he said. "Two to three months ago, it was a 'maybe' and now clients are talking about firming up dates and working back from there. ... My expectation is that this is going to be a spring that turns into a trickle that turns into a stream that turns into a river."
Some areas to keep an eye on, according to Watson, include fintech, cybersecurity, risk and compliance, and artificial intelligence, though he cautioned for AI it's still "very early days."
"Fast-forward twelve months, we're in a pretty robust M&A environment," Watson said. "It won't be at that 2021 peak, but we'll see a good market ... especially since there's now a backlog of deals now that would have gotten done absent of market dynamics."
Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.
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Tech M&A picking back up again — but don't expect megadeals - Yahoo Finance
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