AI Dealmaking Offers Hope to Embattled Tech Sector

The TMT sector looks set to roar back in dealmaking terms over the next 12 months. According to the 2024 SS&C Intralinks Global M&A Dealmakers Sentiment Report, the industry is expected to see the highest growth in deal activity over the next year. Nearly two-thirds of respondents (61 percent) think the sector is the most likely to see an uptick in 2024.

Tech’s fall from grace

The buzz surrounding the sector marks a welcome return to form for the industry hit hard by elevated interest rates and recessionary fears. While TMT continued to be the most active sector globally in 2023, it witnessed the worst year-over-year volume performance of any sector globally — a 29 percent drop to 8,630 transactions. A shift away from larger, more capital-intensive deals also knocked deal value, which sank by 38 percent to USD 62.7 billion.

The tech segment in particular has been battered by market headwinds. An end to the cheap-money era meant that valuations could not be maintained. A dramatic slump in stock prices followed, with M&A pushed to the back of executives’ minds.

Shaken by high inflation, global conflicts, and a potential recession, 2022 was one of the worst years for tech valuations on record. It was the first time that the tech-focused Nasdaq dropped values for four quarters — ending the year 33 percent below the beginning. This caused major losses for industry leaders such as Amazon, which saw its value halved over the year.

Valuations continued to plummet in 2023, with the collapse of Silicon Valley Bank sending shockwaves across the industry. Start-ups were hit the hardest: the top ten tech unicorns lost an estimated USD 10 billion in value throughout 2023.

“Magnificent 7” pull the strings

An uptick in dealmaking in 2024 will likely be driven by the “Magnificent 7” — namely Apple, Microsoft, Google owner Alphabet, Amazon, Nvidia, Tesla and Meta. This select group of businesses delivered strong financial results in 2023 despite market headwinds. They are currently doing the heavy lifting in the S&P 500: Their stock valuations are up 90 percent compared to the rest of the industry since the start of 2023, while the other 493 stocks were up just 18 percent.

The hunt for innovation has been a major growth driver as these major players look to capitalize on the rise of generative AI. This enthusiasm has already begun to translate into deal activity, as seen in Microsoft’s USD 10 billion investment in ChatGPT maker OpenAI, announced at the start of 2023.

Just last month, Microsoft, Open AI and Nvidia were among a team of investors involved in Figure AI’s USD 675 million fundraising. The Silicon Valley start-up is developing gen AI-powered humanoid robots for the workforce.

Integrating AI: buy vs. build

M&A offers an efficient way to onboard new AI technologies at speed rather than to build in-house. Some big-ticket deals have already changed hands in 2024 as businesses look to get ahead of the curve. AI-enabled cybersecurity is a key growth area, as seen in Cisco’s record purchase of U.S. cyber software firm Splunk. Valued at USD eight billion, the deal was 2023’s largest tech transaction.

This was followed at the start of 2024 by HP’s USD 14 billion purchase of Juniper Networks — maker of AI-enabled enterprise networking operations (AIOps) — as the computer giant looks to boost its AI offering.

Another huge deal driven by AI demands was chipmaker Synopsys’ USD 35 billion purchase of Ansys, a maker of AI-augmented engineering simulation software used in industries such as Automotive and Construction. The deal, also announced in January, is the biggest to take place within the tech sector since Broadcom’s purchase of software maker VMWare, completed last November.

Start-ups search for stability

While the Magnificent 7 are riding the wave of soaring valuations, start-ups continue to suffer the effects of a volatile macroeconomic environment. With vent­ure capital funding at a multi-year low, this segment of the market is struggling to access the capital needed to secure growth. Being acquired by a financially stable company could be an attractive option, and a fresh wave of M&A could take place as this market dynamic plays out.

Adapt to survive

The burst of big-ticket deals at the start of this year indicates that tech firms are putting the past few years behind them and are ready to pursue growth. A revival certainly looks on the cards, driven by the Magnificent 7 and the aggressive pursuit of AI.

Dealmaking will span a wealth of industries — from chipmaking to cybersecurity — as businesses look to ingrain AI capabilities and streamline their operations. Companies that fall behind on the hunt for innovation risk losing out.

The 2024 SS&C Intralinks Global Sentiment Report can be downloaded here.