The technology sector is so hot in 2020 even a pandemic can’t slow it down. After a first half to the year in which tech stocks rebounded better than other markets from the onset of the Coronavirus pandemic, it’s looking like more deals and new IPOs will keep driving consolidation - and valuation - in the sector.
Companies like Amazon ($AMZN) and Uber ($UBER) did billion-dollar deals this year, but the next wave of M&A could put these price tags to shame, as investors globally look to make the most of a rising market. Next, if just two deals go down, it amounts to around $100 billion of equity potentially changing hands. And increasingly, it looks like they're going to happen - which would create a fee bonanza for big banks that just saw their M&A teams power them to a successful second quarter.
Goldman Sachs is reportedly advising Softbank on a possible deal for its crown jewel, Arm Holdings ($PRIVATE:ARMH), a chipmaking unit the Japanese conglomerate bought in 2016 for $32 billion. On top of that, in the US, Dell ($PRIVATE:DELL) recently announced it would consider selling off its whopping 81% stake in VMWare ($VMW). Per statement from the company, that second deal wouldn’t come until 2021.
What can we expect as more M&A brews up in the tech sector? Well, even after the NASDAQ's rebound, look for companies considering M&A to tighten the reins on hiring, leading up to a deal. The tech sector is outpacing other industries' M&A so far this year. No different than the rest of the tech sector, VMWare job postings - seen above - have dipped steadily throughout the pandemic.
In a regulatory environment viewed as friendly to dealmaking, technology deal teams on Wall Street and in Silicon Valley are facing a wealth of opportunity now that the NASDAQ has outpaced other markets’ returns, and companies are eager to make public market debuts, or consolidate. A recent report notes that the tech industry has been particularly resilient in the M&A marketplace - for example deal value fell only 2% in the first quarter of 2020, while globally and across all industries, the value of first quarter M&A fell 39%.
As for the very biggest deals, they have yet to play out - and here is no guarantee either of the potential transactions - VMWare or Arm Holdings - will go as planned. In fact, there are international legal and branding issues that may harm Arm’s sale, or its valuation. The company's seal, belongs to its CEO, and isn't yet owned by Arm - which may impact up to 20% of the chipmaker's revenue, according to reports.
Softbank's Chinese chipmaking venture can’t get rid of its CEO because he won’t return the company seal. It puts 20% of Arm revenue at risk and adds to a list of investment headaches for SoftBank boss Masayoshi Son, says @petesweeneypro: https://t.co/o5eA9BGi5A. pic.twitter.com/VHBDjkPII8— ReutersBreakingviews (@Breakingviews) June 22, 2020
That's just the hardware M&A - there has been quite a bit of consumer-focused deals that helped to prop up tech deals in the first half of the year. Credit Karma was one of the first half's biggest deals, and, leading up to the $7 billion sale to Intuit, the company reduced job postings substantially around the time it was in negotiations in late 2019. Remember, this is pre-COVID, the market was flying high, and there was plenty of hiring taking place. The completion of the sale to Intuit may mean that some job postings have transferred over to Credit Karma's owner - or, it could simply be a sign that the company has held off on hiring as it looks to get back to business as usual.
There were plenty of other deals in the finance and tech space: Morgan Stanley spent $13 billion to add E*Trade into its financial advisory capabilities - a distinct shift toward automating services that had long been executed by individual client reps, and a prescient move for Morgan Stanley CEO James Gorman just weeks in advance of the pandemic. And, also pre-crisis, Visa spent $5 billion to buy fintech startup Plaid for its portfolio of services.
Finally, there has been a feast of M&A in the food delivery space - Uber first sought to buy out Grubhub, before the latter found a better buyer with a bigger bid, leaving the ridesharing app in a position of needing to acquire Postmates in a deal valued at more than $2.6 billion. So, to go along with the major tech deals brewing, there is also a rising likelihood that fintech M&A and other key consumer services could shift into high gear, especially if consumers are facing a prolonged lockdown thanks to the pandemic.
About the Data:
Thinknum tracks companies using the information they post online - jobs, social and web traffic, product sales, and app ratings - and creates data sets that measure factors like hiring, revenue, and foot traffic. Data sets may not be fully comprehensive (they only account for what is available on the web), but they can be used to gauge performance factors like staffing and sales.