Big deals are still happening, but startup M&As may be in the process of transformation
As anyone who follows tech stocks has noted recently, there was a downturn.
Even so, public tech companies have done some big startup mergers and acquisitions deals recently. Recently, e-commerce software company Shopify said it is buying logistics and fulfillment unicorn Deliverr for $2.1 billion, marking its biggest acquisition to date. Earlier, chipmaker AMD announced another major purchase, buying Pensa for $1.9 billion.
Meanwhile, startups continue to snap up other startups at an unusually fast pace. There were 124 acquisitions of US-based VC-backed companies by other VC-backed companies in the first quarter of this year, according to Crunchbase data, the highest first-quarter total in a decade.
But with the IPO market in a deep freeze and technology valuations seeing their sharpest downward revisions in years, can we expect mergers and acquisitions to slow down?
Probably not. In fact, we are likely to see a “buyers market” emerge in the coming months, as deep-pocket acquirers grab targets at prices far below they were a few months ago.
It may take some time to adjust. Startups tend to lag behind public markets in resetting valuations, which typically happens when a new round is closed. Venture investors will also obviously not be thrilled with M&A transactions with valuations below where they invested.
Shopify’s acquisition of Deliverr, however, indicates that late-stage investors may be willing to accept a solid deal and forgo a big return. Deliverr’s latest private funding round, a November Series E led by Tiger Global Management, reportedly set a post-purchase valuation of $2 billion – just 5% below the purchase price. That’s not a terrible result for Tiger, but it’s certainly not something to brag about.
In the future, startups that want to be acquired will have to quickly face a reduced price environment.
Given that so many publicly traded tech companies have seen stocks drop, they will seek similar reductions in their acquisition targets.
If you’re considering making a deal and your multiples are down 40%, the good news is that the companies you’re looking at are being valued at the same multiples.