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Software, connectivity, data and fintech dominate M&A in Silicon Valley

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Samengo-Turner William
William Samengo-Turner

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Victor Ho

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Alexander Touma

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Daren Orzechowski

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Silicon Valley

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07 October 2021

As transaction activity in the tech sector continues to power ahead, new challenges and opportunities are confronting Silicon Valley companies and setting the agenda for the industry.

Windows on a modern glass and metal building

Transactions in the technology sector continue to outpace the rest of the market, with Silicon Valley remaining an important and powerful engine driving deals globally.

Over the summer, we have seen Silicon Valley tech companies continue to invest through acquisitions or preparing the runway for their next round of fundraising.

The U.S. boom in special purpose acquisition companies (SPACs) in the last two years has also added a new dimension to the deal calculus. A high proportion of SPACs have a stated aim to invest in technology. SPACs provide an alternative route for a company to access the public markets instead of a traditional IPO or a direct listing.

Taken together, transaction activity looks set to be very busy in the months ahead.

Covid-19 has energised tech M&A

Technology-focused transactions have proven far more resilient than those in other sectors, thanks in part to the way the pandemic has accelerated the adoption of technology right across society from online shopping, to banking, telemedicine and tools to facilitate remote working.

Many of the deals we are now seeing are focused on software or software-enabled technologies, often powered by the latest advances in AI, analytics and deep tech.

In the aftermath of the pandemic, connectivity is a particular focus, as players seek to bring increasingly powerful services to market, such as workplace collaboration tools. We’ve also witnessed a shift to cloud/as-a-service models and the increased use of automation.

In bringing these new solutions to market, companies have three basic options:

  • build the technology
  • buy it through M&A deals or otherwise license it from others
  • collaborate with others through joint ventures or alliances

The latter option is a major feature of dealmaking in Silicon Valley with so many innovative companies clustering together in what is still the world’s most important technology centre. Such alliances might, for instance, see one company bringing its enhanced software solutions to another’s technology platform, providing an improved overall experience for the companies’ common customers.

It’s notable that eight of the top 10 tech deals in our data are software related, covering in an increasingly broad range of applications, with all the biggest tech companies  investing heavily in this area.

Salesforce, the cloud-based software company, is an example, buying Acumen for USD570 million, then Slack in a USD27.2 billion deal, and Servicetrace for an undisclosed sum, in short order.

Fintech and the humanisation trend

Fintech continues to be a segment seeing massive innovation and growth, once again spurred on by the way the pandemic has normalised the use of online and mobile technologies.

It’s also an area that illustrates a growing trend across the tech sector towards the humanisation of technology, that means offering end users greater control over all the disparate pieces of technology they rely on in their lives.

Challenger banks have put technology at the heart of their offering, giving their customers new ways to manage their accounts online, and we are seeing a burst of creative fintech solutions coming to market.

Traditional banks are exploring a number of ways to find innovative customer solutions, including bolt-ons, outsourcing and consultancy arrangements, and also in-house solutions, developed via either the buy or build model.

Silicon Valley remains a powerhouse in fintech. But this is one segment of the market where competition is particularly fierce in other markets, notably New York, London, Singapore and China. There tech companies are thriving as they respond to specific demands in these major financial centres.

Top 10 tech deals

 

The importance of data

Where Silicon Valley deals are concerned, the exchange of data, what is shared and what is not, can be almost as important as the financial terms of the transaction.

Most of this is due to the rapid increase in the amount of data we share and the value companies can derive by inventing new ways to monetise its use or to improve the experience of their users.

But it is also a result of increasingly tough regulation on the use, storage and distribution of data.  The global data obligations are growing in complexity as key countries deepen their regulatory frameworks and harmonisation grows more challenging.

In Europe, the EU’s General Data Protection Regulation (GDPR) has driven the agenda. With the introduction of the California Consumer Privacy Act (CCPA), and with the California Privacy Rights Act passed and coming into full force over the next 15 months, U.S. law is moving in similar directions on key issues such as rights to:

  • correct inaccurate information
  • put limits on the amount of data collected on individuals
  • restrict additional purposes for which data may be used in the future

In Asia, a raft of new data regulations in China highlights its data approach. This has been particularly accentuated by the investigation into Didi’s data practices.

Many tech companies would like to see greater harmonisation as it would reduce escalating compliance costs and complexity. But these laws differ in significant ways, and the dream of globally agreed rules remains a distant one in the current climate. 

That presents companies operating across borders with considerable operational and deal-related challenges, forcing them, at times, to take a jurisdiction-by-jurisdiction approach to compliance.

Economically, it would make sense to store data in one central server farm. But in some countries there may be a requirement that, if data is being collected on a national basis, that data must be stored in country and not housed in another jurisdiction. Localising data in this way has big cost implications and creates significant complexity for those designing data governance processes and systems architecture.

Other challenges abound, not least how companies manage and account for the data they hold in countries where the state demands far greater access to personal information than would be allowed elsewhere.

In a deal setting, this marks a significant change. Ten years ago, it would have been inconceivable that data considerations could knock an M&A deal off the table. Today, it very well could.

Global demand for chips grows

Shortages in the supply of semiconductors have emerged as a significant challenge for tech companies this year and problems look set to persist.

That’s down to soaring demand. The Semiconductor Industry Association has said that year-on-year global chip sales grew by over 29% to USD44.5bn in June this year.

Supply chain disruptions, in part exacerbated by the trade stand-off and political tensions between the U.S. and China, have led to major delays in getting products from manufacturer to market.

In addition, semiconductors are now fully in the focus of governments and antitrust regulators as an important strategic concern, likely to impinge on national security.

Any attempt to buy a chipmaker is likely to be reviewed in many jurisdictions, no matter how small, as we saw with the attempted takeover of Newport Wafer Fab in Wales by Nexperia, a Chinese-owned company based in the Netherlands.

For that reason, efforts to fix the shortage of chips are more likely to involve supply-chain engineering and commercial arrangements to obtain materials and manufacturing capacity rather than strategic transactions, such as M&A.

Cybersecurity – deals and diligence

The pandemic has exposed major weaknesses in corporate and government information systems with a huge spike in serious cyberattacks.

But, as companies across sectors undergo digital transformation, cybersecurity is provoking tougher action by regulators as more and more organisations – some in critical areas such as energy supply – become targeted for attack.

Dealmakers in whatever sector must now carry out far deeper and more searching vendor due diligence around cyber risks.

However, the weaknesses exposed during the pandemic, with hybrid workforces challenging the old notion of an IT fortress protecting company security, have had another effect.

This year has seen an explosion of investment in new cyber technologies, such as so-called “zero trust” systems, both by venture capital funds and by PE and other financial investors.

Notable deals include:

  • Bain’s USD900m acquisition of ExtraHop
  • TPG’s USD1.4bn deal to buy Thycotic, which it immediately merged with Centrify, another recent cybersecurity investment

We fully expect this activity to continue.

China and U.S. trade tensions continue

Hopes that the Biden Administration would usher in a new era of warm trade relations between the U.S. and China now look particular naïve. The complexity of the relationship, including technology leadership rivalry and human rights issues, complicate the fact that both countries rely on an interconnected supply chain. The Committee on Foreign Investment in the United States (CFIUS) remains a robust hurdle for investment into the U.S. Meanwhile, China continues to court foreign investment even as it is embarking on the re-shaping of its domestic environment through initiatives such as the “Common Prosperity” initiative, domestic antitrust actions on Big Tech and a range of new regulatory actions. In the IPO space, Hong Kong looks to be the winner for Chinese companies seeking to list over the traditional U.S. markets. 

Outlook for the Valley

Silicon Valley not only remains a driving force in global technology transactions but an important indicator of both the opportunities and challenges facing the sector globally.

The evidence so far this year is that investors remain highly confident and ready to deploy growing amounts of capital in the sector. We fully expect the Valley and, by extension, the global tech market to continue dominating M&A league tables in the months ahead.

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