Dealmaking makes a comeback as tech giants battle for dominance in artificial intelligence
Dealmakers in the technology sector have battled headwinds over the past few years. Global deal value sank to US$456.6 billion in 2023—a six-year low.
A combination of prolonged market volatility, stubbornly high interest rates, heightened regulatory scrutiny and plunging valuations all dampened dealmaking.
M&A activity by value 2017 – 2024 [YTD]
Target location: Global Bidder location: Global Sectors: Computer software, Computer: Hardware and Computer: Semiconductors
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Effective July 1, 2023, the underlying Mergermarket data supporting the M&A Explorer was consolidated with Dealogic data to produce an even more complete picture of the M&A marketplace. M&A Explorer commentary published before July 1, 2023 may reference data that does not reflect this consolidation.
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Meanwhile, an annual total of 7,378 deals marked an eight-year low as dealmakers shied away from potentially risky transactions.
However, there are signs that confidence is returning to the sector, fueled largely by the recent acceleration of AI technologies. Businesses are turning to M&A to gain their share of the headline-grabbing technology and get ahead of the pack.
This trend has already generated several big-ticket deals during the first quarter of 2024. A total of US$130.3 billion in tech deals changed hands globally—a 15 percent increase year on year.
And the US market appears to be the engine driving activity, attracting the top seven global technology deals of the quarter. A total of 417 transactions worth US$92.3 billion targeting US assets marks the highest quarterly deal value since Q2 2022, before inflation and interest rate hikes triggered an aversion to riskier assets.
AI fuels top tech deals
AI capabilities were a motivating factor behind the two largest tech deals of the quarter. Synopsys’s mammoth US$33.6 billion purchase of Ansys saw the chip design toolmaker buy into AI-augmented simulation software, a rapidly expanding field that enables businesses to analyze and simulate engineered parts and systems before their manufacture.
The deal—the largest in the tech sector since Broadcom’s purchase of software maker VMWare—reflects the huge value placed on the future of AI. Many predict that chip technology will become embedded throughout consumer life stages, and Synopsys’s acquisition represents the kind of investment that could help to make this happen.
Hewlett Packard Enterprise’s US$14.3 billion purchase of Juniper Networks, meanwhile, sees the computer giant expand its AI-enabled network offering by acquiring technology that enables faster communication between servers.
Return of the “Magnificent Seven”
The strength of the “Magnificent Seven”—namely Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta—and their quest in AI hold the potential to drive technology dealmaking to new heights.
Nvidia has been at the forefront of AI chipmaking activity, investing in no fewer than seven AI-related companies during the first three months of the year. In February, the chipmaker invested in AI startup Figure AI, alongside a team of investors. The US$675 million deal, which included rival tech leader Microsoft, was the largest fundraising round targeting an AI company in Q1.
Figure AI is in the process of developing Gen AI-powered humanoid robots for the workforce. The Silicon Valley startup is tipped to be a pioneer in transforming the global labor market through tackling worker shortages. According to a Deloitte study, the US manufacturing sector will have 2.1 million unfilled jobs by 2030.
Companies play catch-up
But it’s not just the tech giants who are investing in AI. Companies from all sectors are exploring ways to boost their AI capabilities. In-house innovation is unlikely to be fast or transformational enough and M&A will be vital for many to achieve this goal, offering an efficient way to onboard new technologies and talent compared to building organically.
Generative AI—which can “autonomously” produce text, visual and audio responses—looks set to be at the top of dealmaker wish lists. The revolutionary technology first made mainstream headlines following the launch of ChatGPT 3.5 in November 2022. Since then, it has become virtually ubiquitous in its potential applications, as it is capable of enabling businesses to automate and streamline countless tasks that historically have required human effort. The technology holds appeal across nearly every sector, from industrials to media to legal services.
GenAI technology has garnered significant interest from the Magnificent Seven. Microsoft’s landmark US$10 billion investment in ChatGPT developer OpenAI triggered a wave of venture capital investment targeting the technology. A string of high-value AI startups, including Anthropic, Cohere and Inflection AI, are among those boosted by the investments that followed.
Widespread economic uncertainty has lowered valuations in the tech startup space, making them relatively attractive deal targets. Regulation is also having a chilling effect on deals at the top end of the market, while high interest rates make financing for large deals a challenge. High-growth AI startups may offer a less risky and easier financing option for dealmakers.
Outlook: A renewed focus on due diligence
The risks associated with adopting new AI technology, as well as the evolving regulation related to the industry, mean that the due diligence process requires extra care.
A key consideration is how the target company adheres to data protection regulation, which has evolved significantly over the past few years across varying jurisdictions. Scrutiny from regulators is also commonplace, and dealmakers should prepare accordingly.
Development of new AI technology is gathering at a relentless pace, prompting governments to implement new legislation protecting the end user. President Biden has issued an executive order on the safe, secure and trustworthy development and use of AI, while the EU’s AI Act, which sets out a new legal framework that classifies AI systems according to the level of risk they pose to individuals, is expected to come into force in July, although the operative provisions will be implemented on a staggered timeline.
With new frameworks and AI legislation emerging across the globe, as well as myriad legal impacts and ramifications of the use of AI, careful due diligence of specific AI target technologies is vital to the proper execution of such deals.
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