Technology Deal Landscape: Second Quarter 2024 Outlook

Overview of Deal Activity in Technology Space

The second quarter of 2024 witnessed a significant uptick in technology deal activity, building on the momentum from the first quarter. Deal volume and value continued to rise, with Q2 2024 surpassing all quarters in 2023 in terms of total deal value. This surge in activity can be attributed to several factors, including the ongoing AI revolution and a gradual unwinding of the IPO backlog. We’re seeing positive signs of tech-based deal growth despite uncertainty around interest rates, inflationary pressures, and global instability.

Mergers and acquisitions dominated the deal landscape in Q2 2024, with several high-profile transactions making headlines. Strategic mergers aimed at enhancing AI capabilities were particularly prominent. Venture capital investments also remained strong, especially in AI-focused startups and infrastructure companies. Additionally, the quarter saw a resurgence in IPO activity, with several major tech companies going public after previously pausing their plans.

The technology sector remains the largest in terms of deal volumes, accounting for 83% of the total, with software deals comprising 69% of these volumes. A total of 405 technology private equity deals were recorded for the quarter, marking an increase of 27.0% from the prior quarter and a growth of 42.6% compared with the same period last year. Notable deals included Cisco's $28B acquisition of Splunk and Synopsys' $35B acquisition of Ansys, highlighting the importance of AI integration.

Exits

Throughout Q3 2020 to Q4 2021, U.S. private equity exits flourished. Low interest rates, strong valuations, and strong investor demand bolstered exit opportunities.¹ Deal values on a quarterly basis ranged from $147B to $263B, and deal counts increased from 292 to 598.² Exit strategies consisted of a relatively equal mix between IPOs, corporate acquisitions, and sponsor acquisitions.

In 2022, the Fed embarked on a series of interest rate increases. Rate increases coupled with inflation and pessimistic investor outlook stalled exit valuations. Activity throughout 2022 to Q2 2024 has paled in comparison to 2020 and 2021, with deal values ranging from $52.6B to $84.6B and volume of deals falling from 364 to 201. Exit strategies are predominantly corporate acquisitions or sponsor acquisitions, with slowly growing IPO activity.

Although activity is down in comparison to 2020/2021, the U.S. PE exit value increased by approximately 15.0% YoY in H1 2024. Q2 2024 saw $21.7B in IPO exits, $34.4B in exits to corporates, $13.9B in sponsor-to-sponsor exits, and $1.4B in exits to contribution funds.

When looking at the technology sector specifically, technology lead the PE exit value for Q2 2024. Pitchbook reported the technology exits were valued at $20.8B, accounting for 32.7% of total exit value, and 36 exits accounting for 20.2% of total exit counts.³ The lead is attributable to the $13.4B sale of Windstream, a private telecommunications company, which will be merged with publicly traded Uniti. It is to be noted when analyzing technology exits absent the Windstream deal, technology exits were $7.4B, hitting a ten-year low.

The overall decline in exits from 2022 onward reflects the overall GP sentiment for better exit conditions. The high interest rate market hinders valuations and potential buyers financing opportunities. GPs must balance waiting for interest rate declines, while satisfying LP’s who are awaiting their capital returns.

Fundraising

Private equity fundraising has outperformed expected forecasts. Through the end of June 2024 U.S. PE funds have closed 129 funds valued at $155.0 billion, which slightly outpaces the first half of 2023.³ In 2024, U.S. PE funds are seeing longer closing periods but significant step-ups in investment contributions. 86% of capital raised was through buyout funds, and 14% was related to growth equity fundraising.

In Q2, late stage and technology growth investment companies saw $19.4B of investments which represents an 11% increase QoQ and 23% increase YoY. Although deal value has increased, deal volume is down. In Q2 2024, CoreWeave, Scale AI, and Wiz secured $1B or more. ⁴ The three companies focus on AI, cybersecurity, and data analytics. The investment echoes investors’ eagerness to invest in the AI revolution.

Outlook for remaining of 2024

Looking ahead, the technology deal environment in the U.S. is expected to remain robust for the rest of 2024:

• AI-Driven Deals: AI capabilities will continue to be a key driver of M&A activity, with companies seeking to acquire or enhance their AI technologies.
• Software Consolidation: Given the high volume of private software companies eyeing 2025 IPOs, we may see increased consolidation as companies seek to strengthen their market positions.
• Private Equity Activity: Private equity firms are expected to maintain their deal pace, focusing on value creation and operational improvements in their portfolio companies.
•  IPO Market Revival: The IPO market is likely to continue its gradual recovery, with more tech companies expected to go public in the latter half of 2024.
• Regulatory Considerations: Companies will need to closely monitor and adapt to evolving regulations, particularly around AI and data privacy.
• FOMC Impact: There is suddenly a growing fear of recession as the market is starting to price in a 50bp rate cut at the upcoming September FOMC meeting.

The discussed shifts illustrate a significant transformation in the sector’s approach to strategic growth, emphasizing a more data-driven and efficient decision-making process. By navigating the current trends and challenges, including economic uncertainties, regulatory pressures, and geopolitical risks, technology companies are charting new paths toward innovation and expansion. As the year progresses, we can expect continued deal activity, with AI, cloud computing, and cybersecurity remaining at the forefront of strategic transactions in the tech sector.

Conclusion

The technology deal landscape in the U.S. during Q2 2024 demonstrated strong growth and strategic focus on AI-driven innovation. By examining the evolving landscape of technology deals, we can see how the

emergence of artificial intelligence and generative AI are revolutionizing the tech industry, particularly in the realms of mergers and acquisitions. As we look toward the future, understanding the implications of these trends and challenges becomes paramount for stakeholders aiming to thrive in a dynamic and competitive environment. The potential of AI to further streamline M&A processes and drive strategic decisions cannot be overstated, signaling a transformative shift in how technology deals are conceptualized and executed. Therefore, it becomes crucial for industry players to remain adaptable, strategic, and forward-thinking, leveraging the insights offered to seize opportunities and mitigate risks in the burgeoning landscape of the tech industry.

Resources

1 Private Equity Exit Engine Stalls | Private Equity Exit Engine Stalls (wilmingtontrust.com)

2 U.S. private equity exit activity remains low | Pensions & Investments (pionline.com)

3 Q2 2024 US PE Breakdown | PitchBook

4 North American Startup Funding Jumped Higher In Q2 (crunchbase.com)