It’s been a quiet year when it comes to tech M&A. In fact, up until this week, there had only been a handful of enterprise deals of substance. It’s unclear whether it was a lack of cash, high interest rates or buyer caution in an uncertain market, but suddenly this week, it’s as though the M&A floodgates finally opened and we started to see some movement.
The question is whether this is a momentary burst of enthusiasm, or if it’s the start of a long-awaited M&A extravaganza. Time will tell, but on Monday IBM grabbed Apptio for $4.6 billion in the most expensive deal of the week (so far); then Databricks announced it was getting MosaicML for $1.3 billion, Thomson Reuters bought Casetext for $650 million, and ThoughtSpot reeled in BI platform Mode Analytics for $200 million.
Later in the week, Visa announced it would pay $1 billion for Brazilian fintech startup Pismo.
That was a fair bit of activity for such a short period of time with a total of $7.75 billion changing hands in the process. One big reason for that is the growing enthusiasm for AI and data to fuel machine learning models. Companies are shopping for pieces that can help them build AI tooling internally, or to add as part of an existing offering. Perhaps it’s not surprising, then, that three of the four deals on Monday involved AI or data, driving home the point that these kinds of properties are going to be on the move in the coming months.
Certainly Databricks paying $1.3 billion for Mosaic to get a much-needed technology for its stack shows that valuations will be going up and similar startups could start to receive offers they simply can’t refuse.
Could be the start of something
Whether it’s AI, data or some other reason, Lily Lyman, general partner at Boston-based investment firm Underscore VC, thinks this could be the beginning of something more sustained than a one-day burst of activity as companies without other options start looking for buyers.
“There was always going to be a natural lag time between the closing of the IPO market and the point at which founders, CEOs and board members recognize that M&A may be the only viable exit opportunity for the next several years,” she told TechCrunch+. “In other words, the buyers were always there, but the sellers are now beginning to listen. We expect a dramatic increase in ‘supply’ in the next nine months as runways shorten for those companies who have not figured out how to balance efficiency and growth.”
She thinks this could be just the start of some sustained M&A activity. “In short, what we are seeing is the hangover from the funding binge of two years ago that is coming home to roost. Throw in strategic AI acquisitions or courageous IPOs, and the drought is well on its way to over.”
Ray Wang, founder and principal analyst at Constellation Research, also sees a market that appears to be coming together — and opening up. “Let’s start with the M&A question. There are a lot of companies that are finally being fairly valued. We’ve had a dearth of IPOs and an even bigger drought in M&A,” Wang said.
Gentle tailwinds
The combination of rising rates, economic uncertainty, and falling tech valuations made selling a company harder in the last six quarters. Outside of the AI realm, that is; in tech hot spots, deals can get done at aggressive prices regardless of macro conditions.
But for non-AI startups, rising rates made money more expensive (making debt-fueled takeovers more difficult), a lackluster economy threw growth rates into doubt (making it harder to math-out deals), and a rough-and-tumble valuations climate meant that entities looking to acquire could wind up catching a falling knife if they picked up a smaller company.
Much of the turbulence has settled. The pace of interest rate hikes has slowed (paused, even, in the key U.S. market); there are signs of strength, at least in the United States’ economic performance; and tech valuations are starting to perk up.
This means that the cost of debt is no longer rising at the same clip, there’s a more stable economic foundation to project against, and with valuations no longer falling, paying present-day market norms is less likely to cut hands looking to close around deals. Those factors alone could unlock a good amount of M&A activity, provided that enough unicorns are finally willing to admit that their old valuations are no longer pertinent to the present moment.
There’s also a small chance that the IPO market could help clear some of the backlog in the wake of the smashingly successful Cava debut, but that won’t move enough pieces around to really change the current tech landscape of beached unicorns stuck far from liquidity. M&A could potentially get a lot more done.
Finally, there’s AI. One reason we could see a lot more startup and unicorn M&A is that a huge slice of the upstart tech market today is leaning heavily into the current generative AI craze. And with good reason: As TechCrunch+ recently explored, large private and public data companies are buying startups to fill in pieces of their AI stacks. They won’t be the only players looking to snap up AI talent and tech, even if it does make sense that data-focused companies are getting into the ring the fastest; as AI is forged from data, it makes sense that companies with massive repositories of customer information are diving into neo-AI tech as quickly as possible. We simply expect other corporate groupings to do the same in time.
Startups are responding to market incentives. In a recent Bloomberg TV appearance, Y Combinator’s Garry Tan said that more than a third of startups in his current accelerator cohort are AI-focused, and around half are using the tech in their work. Those companies will have a low vapor pressure, so long as the economy doesn’t reverse course and drive into a ditch. Or another war sparks up. Or something else terrible happens.
Should the IPO market open up again in the future, we will once again see a rush of public flotations. Until then, while public offerings remain more curiosity than regular occurrence, M&A has a shot at the spotlight, as this week’s activity has shown. We’ll be keeping close tabs as Q3 kicks off. Perhaps, at last, we are in for a wave of dealmaking. Heaven knows we’ve been waiting, so we can hardly imagine the sheer weight of accumulated investor impatience.