Virtually all industries are experiencing declines in both the volume and value of trade deals. The technology sector, however, remains among the least affected, and law firms have continued to oversee tech-based M&A dealings throughout the COVID-19 crisis. This article provides an overview and analysis of this trend, addresses the factors that may make tech M&As particularly likely to be pursued and succeed, and offers a concluding discussion on the implications of this trend on market competition.
Overview and Analysis of 2020 M&A Trends
Compared to Q1 2019, overall global deal volume is down 35%, and the value of those deals has fallen a whopping 39%. However, looking at the technology sector, deal volume is down only 15% and deal value 2%. Furthermore, the deal value for tech-sector M&A shows a slight increase from Q1 2019 once media industries are included.
These data leave open the question of why technology companies are so actively pursuing M&A deals compared to other industries. There are several possibilities. First is the need to re-design logistics operations. Online commerce has grown under COVID-19, and many companies now need additional assets to keep up with this demand. Increased warehouse space, streamlined shipping routes and supply lines, and technological integration, for example, are needed for an efficient online customer service experience. These new requirements put pressure on businesses to either acquire or merge with existing companies to pool resources and effectively manage a transition to a more virtual and tech-based operating model.
The second explanation for recent tech sector M&As is the need to generate additional revenue streams during COVID-19. Lululemon’s June acquisition of Mirror is an example of a non-tech-based company seeking to gain technological assets to diversify and broaden their existing customer base; Lululemon acquired the home fitness start-up, which offers a wall-mounted machine that can stream work-out videos, as a means to generate and promote online and digital content.
Finally, COVID-19 has amplified existing competition between technology companies. The increase in people working from home has led to a higher demand for services such as team organization software, cloud storage, and more advanced cybersecurity. Tech companies can benefit by acquiring companies that offer these services, along with those that provide servers and server warehouses. Indeed, the sudden push to digital workspaces has accentuated an already growing demand for such data centers: in July, Analog Devices bought Maxim for 21 billion USD, recognizing the strength that Maxim’s access to the data center market could bring.
Not all tech sector M&A mergers are responding directly to the new market demands of COVID-19. Some are simply using this opportunity to buy up struggling companies that would have offered strategic advantages even before the virus. I discuss next why technology companies may be in a unique position to negotiate M&A deals, regardless of the specific digital demands arising from COVID-19.
Success and Multitude of Tech-sector M&As
The technology sector may be more amenable to M&A deals not just because of the digital demands resulting from COVID-19, but because of a specific asset that the industry enjoys: IT-infrastructures that encourage business flexibility.
IT flexibility concerns the way that information is spread across an organization. To be optimized for flexibility, documents and files will be readable in multiple formats, information decentralized to allow for fast decision making at each organizational level, and the routes by which information flows easily adjustable to serve new emerging interests. Companies with flexible IT-infrastructures tend to enjoy flexible business strategies. They can quickly obtain data at each segment of the supply chain to learn about new potential acquisition opportunities. Furthermore, they can more easily integrate two existing IT-infrastructures once an acquisition is made. Technology companies, some of whom specialize in the creation and management of IT-infrastructures, may be more likely to have a flexible and agile approach to information management. This flexibility could lead to increased knowledge of M&A opportunities, and an adaptable infrastructure could raise the likelihood of success once a merger or acquisition is executed.
Implications for Companies and Consumers
COVID-19 has changed the corporate landscape. Many companies, even large ones like J.Crew, have filed for bankruptcy. Others, particularly in the technology sector, have taken advantage of the opportunity to buy out the competition or otherwise shore up their reserves. The implications of this consolidation of market players should not be ignored. As companies continue to close, be bought out, and merge, competition will continue to decrease. For consumers, this means fewer choices in product and service purchases and the possibility of less competitive pricing. It will take a balancing of anti-trust regulations alongside carefully thought out exemptions or special-circumstance clauses to ensure that both companies and consumers remain protected during this time. After all, if smaller companies cannot survive this economic recession, consumers may be left with the same limited options an unregulated merger might produce.