Heads up, CEOs: Hot tech M&A market expected to soar through 2022

Here are tactics Gartner suggests to adjust to changing market conditions and to keep a step ahead of the competition.

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By 2022, the level of tech provider global mergers and acquisitions activity will surpass previous highs recorded in 2018, according to Gartner. This uptick is anticipated to continue through the rest of 2021.

While acquisitions of tech providers were briefly impacted by the onset of the pandemic, as the economy began to recover this year, M&A activity quickly rebounded, the firm said.

"Market conditions for deal making will continue to improve as volatility stemming from COVID-19 subsides," said Max Azaham, senior research director at Gartner, in a statement. "Tech CEOs pursuing acquisitions should anticipate increased competition for targets and take steps to gain advantages over other acquirers to earn seller acceptance."

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Acquisition activity was most adversely impacted during the second quarter of 2020, but activity in the fourth quarter was higher than in the last two years, Gartner said. Acquisitions of communications providers led the rebound in the second half of 2020, followed by acquisitions of services and software companies.

Where tech acquisitions were prominent

Throughout 2020, financial acquisitions of software providers represented over half of all such acquisitions, Gartner said. Despite software already being the largest category, financial acquirers' increasing interest should drive higher activity in 2021, the firm said.

The largest M&A activity gains in the second half of 2020 involved financial acquisition of communications providers (93% growth), and acquisitions of services providers by financial acquirers were 30% higher in the fourth quarter of 2020, compared to the average the prior two years.

Consolidation of providers with high degrees of overlap increased by 65% and 40% in services and software markets, respectively, in the second half or 2020, compared to the average number of M&A transactions in 2018 and 2019, Gartner said, noting that transactions of over $1 billion in value were excluded.

Tech CEOs must be prepared for competitive landscapes where key competitors merge, given these consolidation trends, especially among service providers, the firm said.

"Instead of making acquisitions or being acquired, tech CEOs will start to consider partnerships and ecosystems to level the playing field against larger companies resulting from consolidation in their markets," Azaham said.

Expectations enterprise customers have  

The expected uptick in M&A activity throughout this year cannot leave existing customers behind. Successful acquirers will consider the implications for end-users and make customer experience a top priority across each stage of the M&A life cycle.

CIO customers of vendors undergoing an integration expect minimal service disruptions and transparent communications on product, pricing and support changes, if any, Gartner said. "Without empathy and a deep understanding of what motivates the existing customer base, organizations risk acquiring a customer base that will churn following deal closure," Azaham said.

The outlook for this year and next suggest the M&A landscape will become a seller's market as acquirers look to make purchases in specific areas. To exploit these changes in market conditions tech CEOs must gain an advantage over other acquirers.

Some of the steps Gartner recommends they should take are:

1. Strategy. Develop a clear acquisition strategy that begins with internal self-assessment. You and your executive team members should assess your organization's strengths and weaknesses and identify critical needs.

2. Pipeline. Build a pipeline of acquisition targets leveraging market research and intermediaries well ahead of potential deal-making. Be strategic in screening potential targets to avoid being drawn into targets as they become available. Build a team that can quickly evaluate potential acquisition opportunities.

3. Approach. Create opportunities to learn more about target companies through partnerships and other business arrangements. Leverage personal networks to access CEOs and board members at companies of interest.

4. Swiftness. Approach potential targets early in areas where there are critical, strategic needs that will be difficult or impossible to replace otherwise. Approach CEOs and investors of target companies with currency and messages that encourage receptiveness.

5. Prioritize. Identify priority needs for acquisitions. Regardless of the size of your organization, acquisitions will impact the day-to-day running of business operations.

Gartner further recommends tech CEOs prepare, line up financing ahead of time, anticipate the moves key competitors will make, and seek advice from financial advisors on acquisitions, especially if you are not experienced in this area.

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