Big Deals Are Still Happening, But Startup M&A May Face A Reset

As anyone following tech stocks recently has observed, there’s been a lot of downward momentum.

Even so, public tech companies have carried out some big startup M&A deals lately. Just yesterday, e-commerce software company Shopify said it’s buying logistics and fulfillment unicorn Deliverr for $2.1 billion, marking its largest acquisition yet. And just last month, chipmaker AMD announced another huge purchase, buying venture-backed Pensando for $1.9 billion.

Meanwhile, startups continue to snap up other startups at an unusually brisk pace. There were 124 acquisitions of VC-backed companies based in the United States by other VC-backed companies in the first quarter of this year, per Crunchbase data, the largest first-quarter total in a decade. 

But with the IPO market in a deep-freeze and tech valuations seeing their sharpest downward revisions in years, can we expect M&A to slow down?

Likely not, said Alan Jones, a PwC managing partner and TMT deals group leader. He said it’s probable we’ll see a “buyer’s market” emerge in coming months as deep-pocketed acquirers pick up targets at prices far below where they were a few months ago. 

It may take some time to adjust. Startups tend to lag public markets in resetting of valuations, which typically happens when a new round closes. Venture backers will also obviously not be enthused about M&A deals at valuations below where they invested.

The Shopify acquisition of Deliverr, however, indicates that late-stage investors may be willing to accept a solid deal and forego a big return. Deliverr’s last private funding round, a November Series E led by Tiger Global Management, reportedly set a $2 billion post-money valuation—just 5 percent below the purchase price. That’s not a terrible outcome for Tiger, but certainly not something to brag about.

Going forward, startups looking to get acquired will quickly have to face a cut-price environment. 

Given that so many public tech companies have seen shares fall, they’ll seek out similar reductions in their acquisition targets, Jones said, observing:  

“If you’re thinking about doing a deal and your multiples are down 40 percent, the good news is the companies you’re looking at are being valued according to the same multiples.”

Illustration: Dom Guzman

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