2020 has certainly been an interesting year in the M&A market. Analysts and industry experts anticipated potentially slower growth of deal activity from 2019 levels given multiple underlying uncertainties: the impact of global economies, strained U.S. trade relations with China and the U.S. presidential election. Then, COVID-19 hit, leading to a very underwhelming second quarter and speculation that deal volumes would remain depressed for the duration of the pandemic. However, despite all the headwinds, the M&A market had come roaring back by Q3, not experiencing the noticeable lull typical of the lead-up to a U.S. presidential election or any noticeable slowdown overall on account of COVID-191.
While global M&A deal value during the first three quarters of this year reached just $1.86 trillion (USD), a decline of 28% as compared with the same period in 2019, the decline was concentrated in the first half of the year. Global M&A activity began to recover noticeably in the 3rd Q; Mergermarket’s Global & Regional M&A Report, Q1-Q3, 2020 reported that 3rd Q deal values “more than doubled to $891 billion (USD) from the $372 billion (USD) in the 2nd Q.” Technology, Media and Telecom (TMT) has fared better than other sectors, even though April and May 2020 represented the lowest number of tech M&A deals since 1st Q 2009 during the Great Recession. TMT was one of the “busier sectors in 2Q20 globally. In the 3rd Q, the sector emerged as the most active for deals with 760 deals totaling $301.2 billion,” according to data from Mergermarket2.
August M&A activity signaled a turning point, bringing an unexpected increase in deal volumes, primarily within the mid- to larger-size markets, and TMT rebounded even more remarkably. “Six of the largest ten deals announced globally during August involved tech sector targets,” reported MarketWatch3. Nine of those top ten deals were valued at $5 billion or more, the largest number for the month of August since 1999, led by the technology and healthcare sectors. [MarketWatch also reported that deal] values in the technology sector totaled $69.3 billion (USD) for the month, representing 27% of all global M&A activity in August 20204.
Particularly in light of the COVID-19 pandemic, the TMT sector has become more attractive, bolstered by the movement toward digitalization, remote working and e-commerce. Liberty GTS’s Representations & Warranties Insurance (RWI) submissions and deal flow reflect these broader M&A market trends. While Liberty GTS’s second quarter submissions in the Americas were generally down quarter-over-quarter across all industry sectors, submissions for targets in the technology sector decreased at approximately half the rate of submissions overall. In the third quarter of this year, tech submissions rose by approximately a third compared with the same period in 2019, and the increase in tech submissions in the third quarter outpaced that of submissions generally as global M&A activity rallied5.
A RWI policy protects a buyer from financial loss related to an unknown risk arising out of a breach of representation or warranty set forth in the purchase agreement and can provide certainty to buyers and sellers, especially during such uncertain times. Enterprise software and services, “cloud services,” are not necessarily hard assets that can be easily assessed by traditional legal and actuarial standards. RWI coverage for technology transactions requires a distinct underwriting analysis and greater scrutiny during the due diligence process.
Intellectual capital imbedded in sophisticated technology companies and systems presents unique challenges for post-closing deal success. For such targets, the most valuable corporate asset is often the people: the key teams of disruptors and innovators driving a company’s value proposition. In evaluating the risk in a tech merger or acquisition, diligence on this “softer” and less tangible intellectual capital has become an essential component of RWI underwriting. Buyers want to keep the key creators (and their know-how) in place post-acquisition. Buy-side diligence, and therefore RWI underwriting, must focus on areas beyond the “classic” IP diligence, including the terms of employee contracts, the existence of any legacy non-disclosure or non-compete agreements, the adequacy of physical and electronic information security protections and other less-obvious hurdles that may impact the value of the acquisition post-closing.
The global team of underwriters at Liberty GTS has the breadth and depth of experience in the TMT sector to effectively and efficiently analyze the risks associated with tech acquisitions on tight deal timelines. As M&A activity within the tech space continues to grow, Liberty GTS is committed to remaining a trusted partner for both strategic and financial buyers entering or expanding their presence in the sector and continually evolving our approach to underwriting, according to the unique characteristics of each transaction.
- Global M&A shrugs off Covid-19 crisis with massive bounce in third-quarter dealmaking by B. Edwards (October 5, 2020): https://www.globallegalpost.com/big-stories/global-ma-shrugs-off-covid-19-crisis-with-massive-bounce-in-third-quarter-dealmaking-48355468/
- Mergermarket Global & Regional M&A Report 1Q-3Q20: https://www.mergermarket.com/info/3q20-global-ma-report-financial-league-tables
- Surge in megadeals points to M&A recovery as tech sector dominates by L. Saigol (September 2, 2020) https://www.marketwatch.com/story/surge-in-megadeals-points-to-ma-recovery-as-tech-sector-dominates-2020-09-01
- Mergermarket Global & Regional M&A Report 1Q-3Q20: https://www.mergermarket.com/info/3q20-global-ma-report-financial-league-tables
- Based on Liberty Mutual internal data, 2020