Tech

Tech deals plow ahead despite the coronavirus and intense antitrust scrutiny

Key Points
  • The value and number of tech deals has outpaced that of other sectors so far this year and has made up about a quarter of all M&A in the U.S according to data from Dealogic.
  • Tech companies have continued to consolidate and invest during the pandemic, even while under the microscope of antitrust authorities.
  • Researchers say the sector is primed to continue growing even with the threat of increasing coronavirus case numbers.
Mark Zuckerberg, Chairman and Chief Executive Officer of Facebook, arrives to testify during the House Financial Services hearing on An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors on Wednesday, Oct. 23, 2019.
Bill Clark | CQ-Roll Call, Inc. | Getty Images

Splashy tech deal announcements have raised the same question as that about the stock market's continued rise: aren't we still in the middle of a pandemic?

Over the past few months, tech companies have continued to consolidate and invest, even while under the microscope of antitrust authorities. Though some acquisitions appear to be strategic ways to adjust to a post-pandemic world, like Uber's acquisition of the delivery app Postmates, others, like Amazon's acquisitions of self-driving technology start-up Zoox, look like the sort of thing investors would have expected to see in the Before Times. 

The value and number of tech deals has outpaced that of other sectors so far this year and has made up about a quarter of all M&A in the U.S according to data from Dealogic. Researchers say the sector is primed to continue growing even with the threat of increasing coronavirus case numbers. That's because the pandemic has made consumers even more reliant on tech platforms and devices to work and socialize, speeding up the need for innovation that's fueled by the industry's large access to capital. Dealogic's data is based on publicly available M&A announcements as of July 9 of this year, and includes deals that haven't closed yet.

Smaller deals pushing ahead

While the value of tech deals has declined so far this year, deals continue to be announced at a higher rate than in other sectors. Overall deal value in the U.S. has dropped 67% across sectors so far this year compared to last, while the value of tech deals, categorized as computers and electronics, has dropped by about 62%, according to the Dealogic data, which tracks public announcements and reports. But the number of tech acquisitions is down just 13% compared to the same period last year, while the number of U.S. deals overall has dropped 22%.

That could indicate that only the largest deals are failing to go through, a trend that's also expected during an election year, since a turnover in the administration could thwart progress on a lucrative merger under review during the transition.

"A lot of deals are getting done, it's just the big deals aren't happening," said Cole Bader, who leads M&A and co-heads the global technology group at Stifel. That's partly because the fluctuating markets can make it more difficult to agree to a fair stock price in a non-cash deal, Bader added.

Still, the tech industry is uniquely motivated to continue pushing through mergers, even as the economy and health crisis remain uncertain. While other sectors may be driven more by desperation created by the pandemic, the tech industry tends to be driven by strategic imperatives, which were likely sped up by stay-at-home orders, according to Erik Gordon, a business professor at the University of Michigan who studies M&A and technology. 

"Technology is not like warehousing or the grocery business where you can put off things for two years or five years and still operate your core business," Gordon said. "You have to be offering the technology that is wanted today."

That could explain why the computers and electronics sector far outpaced any other industry in the U.S. in terms of acquisition rate over the past 10 years. While the sector has fluctuated in ranking by deal value, it has consistently announced more deals per year than any other industry in the U.S. surpassing 1,000 deals per year since at least 2010, according to Dealogic.

During the pandemic, more users have relied on digital platforms as work and social interactions have been pushed online, forcing tech companies to evolve even more quickly to meet their customers' needs, according to Gordon. That's why Zoom bought encryption company Keybase after a series of privacy blunders early into stay-at-home orders caught the eye of politicians and regulators.

Other acquisitions, like Facebook's planned purchase of Giphy, might have happened anyway, but are also a way to add features that will keep users engaged as they seek more online content.

"What you had five years to do, now you probably have 18 months to do, and that always pushes you toward acquisitions," Gordon said. "The pencil pushers say you're overpaying and you're saying, 'yeah, yeah yeah, doesn't matter. We don't have three years to develop this, we want it now.'"

The antitrust effect

Still, antitrust scrutiny could factor into the equation when weighing an acquisition against building a function in-house. Tech giants like Amazon, Apple, Facebook and Google have received outsized attention on their mergers as they await a congressional antitrust hearing at the end of the month and undergo other investigations on the federal, state and international levels. 

Google announced its plans to buy smartwatch maker Fitbit in November, but is still waiting for antitrust authorities to give it a go-ahead, as politicians voiced concerns over how users' health data could be integrated and sold. Antitrust fears seemed to play a role in Uber's failed acquisition of Grubhub, which would have created a new dominant player in the food delivery market. Instead, Grubhub sold to a European player and Uber bought a smaller company, Postmates.

While smaller acquisitions tend to run under the radar compared to larger ones topping $1 billion, regulators have recently shown interest in evaluating how Big Tech companies amass power through data. The Federal Trade Commission said in February it was reviewing past small acquisitions of Amazon, Alphabet, Apple, Facebook and Microsoft, which hadn't previously been reported to the antitrust authorities. The review, led by the FTC's Office of Policy Planning, aims to understand if the agency has missed important cues about the impact of acquisitions and inform policy updates.

Tech critics in Congress have homed in on deals they've perceived as data-grabs, like Google's plans to buy Fitbit and Facebook's planned purchase of Giphy. Such scrutiny has the potential to suppress the volume of tech deals if they are not allowed to go through and could ultimately lower the total value of closed deals for the sector.

Still, cash-rich tech companies appear to be moving forward with at least a portion of their M&A plans. Deal value is not available for all transactions, but based on publicly reported announcements compiled by Dealogic, Alphabet, Amazon and Microsoft have spent significantly less on M&A so far this year compared to last. Deal value was not available for Apple, but Facebook has announced more than double the number of deals so far in 2020 compared to 2019, accounting for nearly $6 billion compared to more than $2 billion this time last year. 

Primed for resilience

Deal-flow has begun to spring back since the initial U.S. shutdowns in March. According to public data from the FTC, merger filings fell from 138 in that month to just 79 in April. Only 73 transactions were reported in May, but that number shot up again to 111 filings in June.

While the upswing is encouraging, rising coronavirus case numbers could send U.S. businesses back into crisis mode if regions are forced to again limit economic activity to suppress the virus.

"If there is more Covid, if there are other things that push the economy down, if we get a new administration that scares to death out of markets, a lot of industries that are already affected will continue to feel the pain. They might feel increased pain," said Gordon, the University of Michigan professor. "I think technology and healthcare are two industries that are going to be the most resilient."

The largest tech companies tend to stockpile cash, leaving them in a good position to continue spending throughout a downturn. As of late 2019, Alphabet, Amazon, Apple, Facebook and Microsoft made up five of ten companies with the most cash on hand, according to FactSet. All five companies' stocks are positive for the year as of market close Tuesday, while the S&P 500 is down about 1%.

Pent up demand for deals could even accelerate M&A ahead of the November election, according to Vito Sperduto, co-head of global mergers and acquisitions for RBC Capital Markets.

"You normally have that in an election year, but this year, its further exacerbated by the fact that you have the potential for a second wave of the virus in the winter and you had a pause earlier in the year," he said, "so there's a lot of demand and supply that we think is coming to the market."

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