Overall in 2020, we expect there to be a strong tech M&A market. Cash rich companies will look to use this year to acquire tech and talent in a more buyer-friendly market or pursue consolidation opportunities. In the digi-infra space, the lockdown has emphasised the need for continued investment in technology infrastructure and the pace of fibre and data centre deals has only increased as funds and strategics flex their muscles in this critical area.

Developments in Venture Capital

Q1 20 global VC investments were significantly down against Q1 2019 (total number of deals down 20% and total deal value down 9%) and that trend has continued into Q2 against Q2 2019 (total number of deals down 23% and total deal value down 10%). VCs have understandably been focused on ensuring the health of portfolio companies, with further rounds being required to fund certain businesses through the expected crisis duration (with down-rounds starting to appear where business models of portfolio companies have been affected by the crisis, e.g. Monzo).

Deals are still getting done though and we have seen fund raises by the likes of Lilium and Cazoo in Europe (although both of those deals were in the pipeline prior to the lockdown) and Lendingkart (a virtual lender based in India) and Halodoc (an Indonesian virtual consultation app) in Asia. Those sectors benefiting from Covid-19 effects (e.g. certain bio-techs, telemedicine, remote working aids) have also been able to attract new money and VC funds have plenty of dry powder to service these opportunities.

2020 will though likely provide something of a reality check for some of the early-stage companies that are reliant on VCs to meet cash needs. Some may find it difficult to secure the necessary funds and failure rates are expected to increase (even for some with otherwise sound business models). For others, funding terms (including valuations) are generally becoming more investor-friendly (as happened after the Global Financial Crisis) and processes less company-driven as fear of missing out recedes.

Tech acquisitions

It is a varied story across different parts of the sector but, overall, M&A activity has continued in the sector and we expect to see increasing activity as the year progresses. While some of U.S. Big Tech were initially impacted by reduced advertising revenues, all of FAMGA continue to generate substantial amounts of cash and are now trading above pre-crisis levels. With more than $560bn of cash on their balance sheets, we have already seen the major U.S. players starting to make acquisitions as prices moderate and liquidity issues start to bite (e.g. Amazon's play for self-driving vehicle start-up Zoox).

There remain also certain strategic imperatives for U.S. Big Tech and tech investors, for example, the ongoing battle for dominance of digital infrastructure and payment systems in Asia. The major Chinese tech companies such as Alibaba and Tencent are already embedded in the Asian payments infrastructure, and together with Huawei are seeking to rollout cloud and data centre capacity to serve populous markets demanding digital transformation services. In response we have seen Facebook's recent investments in GoPay and Jio Platforms and Google and Microsoft's data centre activity in Asia.

Major Chinese tech companies have similarly performed strongly despite the crisis and China was obviously one of the first countries to emerge from lockdown. We are likely to see these companies and other Chinese players target Europe, other parts of Asia and Latin America in the continued hunt for new markets and product areas, as was seen with Tencent's investment into Afterpay. However, governments have already tightened foreign investment controls relating to technology (see Section 2) and we expect the regulatory response will show an increased level of protectionism in many parts of the sector (particularly for data-heavy businesses or those perceived to be developing critical technologies). At the same time, merger control authorities will continue to increase their guard against killer acquisitions. Some start-ups (if cash rich) may see an opportunity for consolidation if competitors or companies in adjacent business areas are facing distress (Revolut, for example, has indicated it will look for acquisition targets during the crisis). Major corporates are also starting to look at opportunities to acquire technology and tech talent to assist with response to disruption in their markets (e.g. Walmart's acquisition of CareZone and Verizon's acquisition of Blue Jeans Network). These acquisitions may include technology-related suppliers that are facing general liquidity issues. While on average listed technology stocks have effectively regained any losses since Covid-19 started to impact the market, prices of a number of key verticals within the sector remain dampened. Private equity funds and corporates will therefore look for value in the listed company space where pricing remains depressed due to uncertainties around post-Covid-19 trading. A key area of activity for acquisitions is in the digital infrastructure sub-sector. Strong revenue businesses such as telecom tower companies, data centres and fibre businesses continue to attract attention from major corporates and pension funds (e.g. Vantage Data Centres' acquisition (backed by Digital Colony and PSP) of Next Generation Data, the largest data centre in Europe).

With the crisis emphasising the importance of this critical technology infrastructure, we see activity remaining strong throughout the year.

Government funding measures

Governments all over the world have been responding to the Covid-19 crisis with a wide range of support measures designed to keep corporates and businesses afloat during the immediate impact of the crisis. For most developed economies, technology businesses are now a key employer and revenue generator making support for start-ups high on the list of focus areas. These funding measures are unique to each jurisdiction and governments have taken many different approaches with varying eligibility criteria and exclusions. As we emerge from lockdown, the effect of increased debt levels on tech companies could start to create a further wave of M&A and fund-raising activity.

Read more: Government Covid-19 funding measures –support for Fintechs in key jurisdictions (May 2020)

The lockdown has produced some real winners and, as with every down-turn, there is a flight to quality. Stuart Bedford – Tech Sector Corporate Partner, London

U.S. – China tech rivalry has intensified, with U.S. and Chinese companies competing for influence in South East Asia through strategic investments. Niranjan Arasaratnam – Tech Sector Corporate Partner, Singapore

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