Tech M&A headwinds
There are several challenges that the tech sector could grapple with in the next year:
Geopolitical headwinds: Export controls on China may have a negative impact on advanced semiconductor manufacturing, and the ongoing conflicts in the Middle East and Ukraine could threaten dealmaking ability and appetite across the tech sector.
Ongoing regulation: There has been a noticeable increase in tech deal scrutiny in major geographies such as the US, EU, UK and China, leading to significant delays and the termination of several multi-billion dollar planned acquisitions. Moreover, increasing data privacy regulations will make it more difficult to integrate companies that manage sensitive customer data. The recent Biden executive order on AI could also affect or delay advances in GenAI.
Higher cost of financing: Tech M&A activity has been pressured as borrowing becomes more expensive over a longer period. Tech companies, and especially PE firms, have delayed or reconsidered their acquisition plans because of ongoing uncertainty about how long the cost of financing will be higher.
Tech M&A activity to watch in 2024
The quest for GenAI capabilities will continue as the technology becomes a more prominent need across sectors, supporting companies’ desire to transform how they do business and drive growth and profitability. In addition, businesses are boosting investor confidence by embracing AI-related strategies.
Separately, the 2022 CHIPS and Science Act could also potentially give US technology companies funding to make strategic acquisitions to enhance domestic semiconductor manufacturing capabilities and to diversify their supply chains.
Divestitures will release assets that will be available for acquirers. As tech companies continue to adapt to rising interest rates and investor preference for cash-efficient growth, they will continue to consider divestitures of non-core businesses to enhance growth and reshape their profit pools. This is backed up by the October EY CEO Outlook Survey, which revealed that 87% of global tech CEOs expect to actively pursue a transaction in the next year, including more than one-third who expect to divest .
Overall, activity could climb if interest rates ease in the second half of the year, which could increase confidence in the direction of debt markets. Tech companies are primed for deal making: the October EY CEO Outlook Survey shows that 75% of global tech CEOs are planning to invest more in acquisitions in 2024 compared with 2023.