With venture capital totals depressed around the world and the IPO market just starting to poke its head out from hiding, who is buying startups these days? The answer is fewer people than before. But while aggregate M&A deal volume in startup land is a bit of a bummer according to a new report from CB Insights, there are a number of positive data points that should lower cortisol levels among startup founders struggling to close a new tranche of private capital.
Today we’re looking at where deals are getting done from a geographic perspective, contrasting the European market with what we saw in the United States in the second quarter. We’ll also explore how median sale prices are changing, and what sort of return those exits might generate for private-market investors.
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That data is largely bereft of Big Tech activity. Apple was the only company among tech’s most valuable to actually buy a smaller company in Q2 2023: the Mira deal, you may recall. That means when we are looking at second-quarter tech M&A activity, we’re discussing a sample set that is nearly free of the influence of tech’s biggest, and wealthiest, players.
From a trailing perspective, that’s not encouraging. From a forward perspective, given that certain M&A data points improved in the second quarter without the help of the deepest pockets in the industry, we could allow ourselves a bit of bullishness when it comes to M&A totals that we could see next year.
Europe vs. the United States
Europe saw more tech acquisitions than the U.S. in the second quarter of the year: 812 compared to 632 in the U.S. This is noteworthy because by now we know it’s not just a blip in the data; it’s been the case for six quarters in a row.
Deal volume is one thing, but leading in the number of deals done doesn’t mean that Europe is home to the largest M&A transactions. The U.S. is the country that sees the most deals worth more than $100 million. That’s 28, or 41%, of all such deals in Q2.
However, that leadership is declining; according to CB Insights, the U.S.’s historical share was typically closer to 45% to 60%; Europe has been gaining ground. So has Asia: It went from eight such M&A transactions in Q1 of this year to 14 in Q2, a gain of 75%.
Another noteworthy data point is that Q2 saw an uptick in large cross-border M&As: 53% of the deals above $100 million were transnational. That wasn’t the case in 2021 or 2022, when most acquirers and targets were headquartered in the same country.
But it’s a bit early to tell what the rising share of cross-border large M&As means. It could have to do with the growing representation of Europe, where cross-border deals are business as usual, and regional expansion typically part of the roadmap. This, or these deals are less likely to ring alarms for antitrust authorities, for instance.
But while many eyes are on large M&As, it is worth keeping in mind that deals above $100 million remain a small portion of total M&A activity, representing just 4% of total deal volume in Q2 2023. That’s more than in the first quarter of the year (3%) but less than pre-2022 levels; that share peaked at 7% in Q2 and Q3 2021.
As for M&A deals worth more than $1 billion, last quarter’s data indicates that they now make up just 1% of all tech M&A activity. This means that the bulk of deals looks nothing like them.
Are deal prices trending higher?
The median M&A valuation in Q2 2023 was $45 million. That’s in line with historical levels, rebounding from $30.6 million in Q4 2022 and $23.9 million median in Q1 2023. (The median rose a sharp 88% from Q1 to Q2 of this year, which is good news for founders out there looking to find a home for their startup.)
Another way to look at the rebound is that on average, acquirers paid $120,000 more per employee in Q2 than they did in Q1 — around $700,000. However, that metric still remains at lower levels this year than in 2021, which may have been the anomaly all along.
As you can infer from the above, most M&A targets have a fairly small headcount. While those worth more than $100 million tend to have larger teams, two-thirds of all tech acquisitions are of companies with fewer than 50 employees.
Perhaps less expectedly, most of these teams aren’t venture-backed; according to CB Insights, only two in 10 tech M&A targets had previously raised institutional capital, whether that’s VC, PE or growth equity.
With so many bootstrapped companies, it is harder to tell whether they sold for more or less money than backers may have thought they were worth. But CB Insights does have data on the institutionally backed ones, and it’s looking reasonably good, with M&A valuations in the second quarter coming in at 1.4x the company’s last private valuation. That’s a rebound after two quarters in which the figure was less than 1.0x, with a local minimum of 0.6x recorded in Q4 2022 and a slightly less miserable 0.8x in Q1 2023.
One more ray of sunshine: The total value of tech M&A in the second quarter came to $1.1 trillion, up from $800 billion in the first quarter of 2023. The last time we saw a quarterly M&A figure under the $1 trillion mark, according to CB Insights, was Q2 2020, a period most famous for a snap recession and the onset of COVID lockdowns in much of the world. So while the second quarter had some positive data points and some that were less exciting, at a minimum, the total value of sold tech companies is ticking higher once again. We’re a long way from what we saw in 2021 and the first half of 2022, but when you are measuring from the bottom up instead of the top down, the news looks good.
For startup founders not sure if they will be able to raise a proximate venture round, that’s welcome news. Now we just need Big Tech to get busy again with its checkbook, and we’ll have a busy 2024.
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