While Startup-To-Startup Acquisitions Remain Strong, Public Companies Pull Back

Illustration of M&A block letters.

More startups bought other startups in Q1 2022 than in any other first quarter in the past decade, Crunchbase data of disclosed deals shows. At the same time, public companies appear to be pulling back on their acquisitions of startups as the equity markets remain volatile, though that could pick up again if macroeconomic conditions improve.

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The two trends indicate that the turmoil of the public markets haven’t quite hit the private markets yet, at least when it comes to M&A activity.

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, up from 118 deals of that kind in the same period in 2021, Crunchbase data of disclosed deals shows. That’s the highest number of startup-to-startup acquisitions in the first quarter of the past decade.

On the other hand, acquisitions of U.S.-based VC-backed startups by public companies in Q1 is down from previous years, with 99 acquisitions in the first quarter of 2022, down from 150 during the same period last year. 

Public companies pause when buying startups

While startups have still been acquiring each other, public companies appear to be slowing down their startup M&A activity. That makes sense, given the turmoil in the public markets. Concerns about inflation and rising interest rates coupled with geopolitical issues like Russia’s invasion of Ukraine have made investors skittish, prompting stock selloffs. And it was crickets from the IPO market in the U.S. in Q1, with only 18 companies going public.

“I think you’re seeing the earlier-stage M&A activity or the private M&A activity continuing because they’ve just raised a round, it was at a nice valuation, they’ve got plenty of cash,” said Michael Torosian, a partner in the corporate division of the law firm Baker Botts. “Whereas in the public markets you’re seeing the volatility and folks are maybe slowing down on the shopping spree that was going on.”

For one thing, rising interest rates means cash isn’t as cheap, giving companies less incentive to scoop up other companies, including startups.

The public markets also react more quickly to events than the private markets, though the latter usually takes some time to catch up to the public markets’ reaction.

“The public markets are on one end and the private markets have been following the public markets, but not in lockstep,” Torosian said. “It’s been more of a lag.”

Despite public companies’ apparent pullback in M&A activity, there have been some notable deals. Microsoft’s planned acquisition of Activision Blizzard, for example, would be the largest acquisition in gaming and one of the largest acquisitions of the year, even though Activision is a public company.

“I think (public companies) got a little more selective in the companies they were willing to acquire, given it took more to get a deal done,” said Louis Lehot, a corporate partner at law firm Foley & Lardner LLP. “It had to be a more compelling story, not just acqui-hires.”

Possible pickup in Q2

Lehot noted that the first quarter of the year is often quieter for public companies, where they’re looking for acquisition targets they can pull the trigger on in the second quarter. With that in mind, the pace at which public companies make acquisitions could pick up in the second quarter, according to Lehot.

There’s also plenty of companies in the IPO pipeline, and as soon as one big IPO happens, others will follow and go public. That means more money available for M&A.

Global venture investment last year reached a record $643 billion, per Crunchbase data. But while plenty of venture-backed startups are flush with cash, those same companies could re-examine any acquisition plans they had for 2022, depending on how public market multiples affect private markets, according to Torosian.

Companies may start to ask themselves, “‘ How do I want to think about my program? Do I want to continue to snap up other companies or do I want to look at this for the rainy day that may come down if the party of 2020 may be on hold for now?’ ” he said.

Illustration: Dom Guzman

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