Private Tech M&A Update Q2 2024

September 1, 2024

Samira Assessment

For this Private Tech M&A Update, we want to start things off by giving you a short Samira assessment of the trends and movements in the private tech M&A ecosystem during the last quarter.

Like many other players in the industry, we expected more active M&A dynamics for 2024, especially for the tech segment. Advances in (generative) AI, more stable interest rates, and therefore greater economic certainty speak for a higher demand for tech deals, which still holds true. Moreover, advancements in generative AI are driving significant momentum across nearly every tech vertical.

Inefficient capital deployment and distorted cap tables

We are seeing an increase in deals at more attractive valuations compared to a year ago. However, the market still lacks real momentum. This could be driven by several major upcoming elections in key regions, such as the EU and US, as well as other geopolitical factors that heighten overall economic uncertainty. A common issue we frequently encounter is severely distorted cap tables. Companies that raised large amounts of capital during the low-interest-rate era often deployed those funds inefficiently. As a result, while these companies have grown to a reasonable size, they remain disproportionately small relative to the capital they raised. Many of these firms have shifted their focus from growth to profitability to address liquidity concerns. However, while this strategy may resolve short-term liquidity challenges, it doesn’t justify their previously inflated valuations. In addition, high liquidation preferences granted to investors in previous financing rounds often lead to founders receiving no proceeds from the sale of a company. This often results in misaligned incentive structures on the cap table. In this X thread, you can read an example of a founder receiving $0 from a company that raised roughly $10M and got sold at not even 1x their ARR.

Concerns around AI as a barrier to M&A

Another dynamic we’re currently discussing that despite the growing attention AI companies are receiving in the M&A market, they are struggling to close deals at reasonable prices. This is likely driven by the uncertainty surrounding the AI hype. Until 2021, AI companies were defined by their proprietary tech stacks, but this is no longer the case. Companies like OpenAI and their LLMs have made it possible for others to adapt existing technology or build solutions around it, rather than developing advanced AI from scratch. These companies have attracted substantial investments, though many of them are likely to result in wasted capital. Additionally, many companies can now build AI solutions in-house at relatively low costs. However, a challenge with LLMs is that many businesses are using them for the first time, meaning there’s still no clear best practice or insight into how far internal resources can take them, or when it makes sense to bring in external expertise—whether through hiring or M&A. Lastly, AI companies are generally less scalable, less profitable, and have higher COGS compared to traditional software companies.

Private tech M&A rebounding in 2024, awaiting stronger momentum

The private tech M&A market experienced a significant decline in tech deals during the second quarter of 2023 compared to the same period in 2022. However, there has been a notable rebound across all regions when comparing Q2’24 with Q2’23.

Private Tech M&A Deal Count (Source: Preqin Sept 2024)

In essence, these figures confirm our earlier assessment: while conditions have improved compared to 2023, the improvement falls short of expectations. Although market sentiment remains positive, more concrete developments are necessary before we can make clearer projections. With the Federal Reserve cutting interest rates for the first time this year, we’re likely to see an increase in activity.

Strategic trade sales surge in tech M&A

Since the start of the year, strategic trade sales have dominated tech deals in private markets, outpacing both buyouts and secondary buyouts combined.

Private Tech M&A Deal Types – Global (Source: Preqin Sept 2024)

This shift toward trade sales is largely due to PE firms prioritizing operational efficiencies over new acquisitions.

For private equity buyers, elevated debt costs continue to weigh heavily on their ability to generate returns. In contrast, strategic buyers, who represented the majority of deal activity in Q1’24, have increasingly relied on a smaller equity component in their transactions. While traditionally, strategic buyers favor a mix of equity and cash, the proportion of tech deals involving equity has seen a significant decline in recent months. This trend reflects a growing preference for cash-heavy transactions in the current market environment.

M&A upturn focuses on high-impact deals

Deal volumes have shown improvement, in North America and particularly in Europe.

Private Tech Aggregate Deal Value in USD Bn (Source: Preqin Sept 2024)

The contrast between the modest rise in the number of transactions and the significant increase in total deal value highlights a strategic shift. Companies appear to be prioritizing larger, high-impact acquisitions, likely aimed at strengthening competitive positioning and capturing new growth opportunities. In contrast, deal activity in Asia remains subdued, with dealmakers showing hesitation, which has contributed to lower volumes in the region.

Within the technology sector, software continues to be the leading driver of M&A activity. While overall deal volumes remain below historical norms, the value of deals announced in the software sector during the first half of 2024 is set to surpass the totals from the previous year. Software’s predictable recurring revenues and cash flows continue to appeal to both strategic buyers and PE in the current lower-growth environment.

Multiples holding steady

Private Tech M&A Multiples – Global (Source: Preqin Sept 2024)

Examining private tech M&A multiples, we observed a steady rise leading up to 2021/2022, followed by a sharp correction in 2023. However, this decline was not as severe when compared to pre-boom levels. Since the adjustment, multiples have stabilized and remained relatively consistent.