It’s been a rough start to the year for the public and private markets. With talks of interest rate hikes heating up, the S&P fell by 11% in January, making it the worst January since 2009. The tech-heavy NASDAQ composite slumped 12%. European stock markets didn’t fare much better, racking up their worst month since October 2020. According to the WSJ, a whopping two-thirds of 2021 IPOs now sit below their offer prices. As Dave Mclure eloquently said in a recent Twitter thread, “the public market has taken a big !@##%$%^ messy dump on tech IPOs”. The correction wasn’t just limited to the public markets. Many VCs sought to make adjustments, renegotiating deals at lower valuations and even withdrawing contracts amid the continuing stock market selloff.
But it’s not all doom and gloom out there, far from it. In fact, there are reasons to remain upbeat. For a start, markets have rebounded. The NASDAQ is already back to October 2021 values. It’s just too early to know if we’re at the beginning of a long-term correction or just a dip from the peak. What’s likely is that part of the correction was a reaction to interest rates and record inflation. There was undoubtedly a reaction to recent tech valuations hitting astronomical heights too.
Let’s not forget that last year wasn’t a typical year by any means. 2021 saw M&A records smashed with global deals totalling over $5 trillion for the first time. The total number of deals increased 22% from 2020 to 59,748. Venture funding in 2021 also broke records, with global venture investment totalling $643 billion, up from $335 billion in 2020. These figures are jaw-dropping and never sustainable if we’re being honest. That said, there is still plenty of dry powder out there and large deals in tech are continuing.
Mergers & Acquisitions
Afterpay – $29Bn
- Buy-now-pay-later (BNPL) platform – fintech
- Acquired by Block (NYS: SQ)
SIA (Milan) – $5bn
- Services and technologies for banking/ finance sector
- Acquired by Nexi (MIL: NEXI)
SteelSeries – $1.2bn
- Manufactures gaming peripherals
- Acquired by GN Store Nord (CSE: GN)
MoPub – $1.05 bn
- Monetization platform for mobile application publishers – Adtech
- Acquired by AppLovin (NAS: APP)
- Checkout.com – $1bn (online payments platform)
- Bolt – $710m (on-demand transportation platform)
- Swiggy – $700m (online food ordering platform)
- 1password – $620m (password manager)
These deals (and others) suggest some of the fear in markets is unjustified – at least for now anyway. Moreover, contrary to the headlines of “doom and gloom,” there is a case to be made M&A deal-making will remain robust, especially in Q1 & 2. As regulators worldwide gradually introduce aggressive antitrust enforcements and intervene in specific deals, we could see an influx of deals before new and more restrictive regulations make larger deals harder to complete. Intensifying competitive and regulatory pressures could also lead a more significant number of smaller companies in highly regulated industries like fintech to head for the exit, further stimulating the M&A market.
Many of the economic factors that propelled deal-making last year, namely interest rates, haven’t actually changed yet either. VCs, corporates, and others are still flush with cash, and they need to put their money to work.
For the majority of these investors that are sensitive to valuations, lower, more reasonable valuations are a good thing. Lower valuations spur on more deals with bargain deals to be had. And let’s not forget the shift that’s taken place in the last few months. We’ve gone from an entrepreneur’s market to a VC market.
Naturally, the recent drop in valuations will also make companies more attractive to buyers and drive M&A activity. In a low valuation environment, well-resourced acquirers could become especially active as a slew of great value targets hit the market. What’s more, if markets worsen further, growth companies may respond to volatility by looking to raise a new round or exit opportunity via merger or acquisition to steady the ship.
With tech IPOs and SPACs in the mud, some tech growth companies previously evaluating SPACs or IPOs may shift back to the usual tracks of M&A and or further private equity rounds. This could further help M&A and fundraising trends continue.
Long-term underlying trends must also be considered. With competition from new tech startups rising across many industries, corporate buyers will likely continue looking for new IP and customers. In addition, many corporations will need to continue acquiring innovative companies to speed up their digital transformation efforts.
Ultimately, as with most things investment-related, the situation is often more complicated than it looks. Yes, a market correction occurred, and it would seem we’re in for a more volatile year with impending interest rate hikes and tightening monetary policy. Whether geopolitical events (Ukraine, Taiwan) or difficulties in China’s property sector create a systemic crisis and transform this correction into something far worse remains to be seen.
From our perspective, there’s every possibility we won’t hit the unprecedented levels of deal-making seen in 2021. However, the investment environment is still robust. The market correction may end up helping maintain a healthy level, up to levels comparable to top past years, of tech funding and M&A activity in the coming year.