M&A playbook for cash-positive tech cos: How to acquire and grow in 2024

In 2024, the tech sector faces pivotal shifts. How will the industry respond after a bifurcation where a significant pullback in tech sector investment has been paired with a surge in Generative AI investment, along with growing demands for technology regulation.

For tech company leaders navigating global markets, understanding these changes is critical. Biztech Lawyers has compiled its predictions for 2024 in this article, with a focused look at M&A, global tech market investment trends and the broader tech market dynamic.

M&A Tech Landscape

The technology sector is poised for a modest uptick in mergers and acquisitions (M&A) activity, building upon the momentum gained in the latter part of 2023. This period witnessed a surge in strategic deals and mergers, particularly among startups in the United States, United Kingdom, and Australia. Understanding the drivers behind this trend and its implications is essential for businesses and investors navigating the tech landscape.

The Drive for Strategic Consolidation

The primary catalyst behind the recent spate of M&A activity is the need for companies to consolidate cash reserves and streamline operational costs. This necessity stems from a more cautious investment climate, where the previous abundance of private investment funds, often used to fuel aggressive growth strategies, has diminished.

In this new environment, startups and growth-stage companies are reevaluating their strategies. The focus has shifted from rapid expansion, often at the expense of profitability, to sustainability and efficiency. This shift marks a departure from the previous trend where startups burned through cash with the expectation of continuous funding rounds.

The Outlook on ‘Down Round’ Investments

Contrary to some speculations, the likelihood of a significant increase in ‘down round’ investments—where a company is valued lower than in previous funding rounds—seems limited. This skepticism is rooted in the complexity of the capitalization tables (cap tables) of many growth-stage companies. These complexities include various classes of stock, investor rights, and previous valuation benchmarks, making down rounds a challenging and often unattractive option for both companies and investors.

Opportunities in Strategic Deals and Consolidations

Potential for Cash-Positive Companies: Companies that are cash-positive or those that raised substantial capital in 2022, thus retaining adequate cash reserves, are in a prime position to engage in strategic M&A activities. We’ve already seen some initial deals in the Australian, US and UK markets, and we should expect this to increase in 2024. Entities with the financial stability and resources to pursue acquisitions can secure opportunities to expand their market presence or acquire new technologies and talent.

Consolidation as a Strategic Move: For many tech companies, especially startups struggling to secure additional funding, consolidation offers a viable path forward. By merging with or being acquired by more financially stable entities, these companies can achieve economies of scale, access new markets, and enhance their technological capabilities.

Technology Sector Investment

In a rapidly evolving global landscape, the technology sector continues to be a dynamic and critical area of investment. Despite expectations of subdued valuations and investment in 2024, there are emerging opportunities that savvy leaders in tech-related businesses need to consider. These opportunities are shaped by various factors, including regional investor focuses, strategic acquisition strategies, and shifting government policies.

Regional Investment Focuses

United Kingdom: The UK market shows a robust inclination towards software, infrastructure, transportation, and financial services technologies. This trend is supported by ongoing foreign investment projects. For instance, the UK’s tech sector benefits from its sizable market, proximity to European innovation hubs, favorable innovation ratings, and competitive tax rates. This unique combination makes it an attractive destination for technology investments.

United States: In the US, the technology sector is expected to witness horizontal and vertical consolidations. Strategic acquisitions will likely be the driving force behind a modest flow of deals. These acquisitions will demand external investment, with investors paying close attention to the acquirer’s ability to demonstrate synergies and effective integration capabilities. Additionally, the state of interest rates—either flat or declining—could influence an increase in debt or equity capital funneled into growing tech companies.

Australia: The Australian market is particularly conducive for fintech growth. This is largely due to the robust foundation provided by the country’s major banks, which enables founders to scale their businesses rapidly. Australian fintechs are expected to continue drawing significant attention in the investment community. Furthermore, Australia’s quantum computing sector is growing, with the recent launch of the Australian Centre for Quantum Growth being funded by an AU$18.5 million grant from the Australian government.

The Role of Government Policies

A key element in the investment narrative for 2024 and beyond will be government policy, especially on the regulation of critical and emerging technologies used for defence purposes, and those with a dual commercial and defence-related use, with AUKUS countries increasingly taking a ‘walled garden’ approach on defence and dual-use tech.

In just the last few weeks, Australia has moved legislation into Parliament to establish an export control regime that is comparable to the one the restrictive ITAR regime administered in the United States. This regime, touted as facilitating technology transfer between AUKUS partners (which is likely to be unidirectional (from the US) not bidirectional, in any event), would potentially stifle Australia’s capacity to act as a regional defence leader.  

The Bill also raises concerns given it introduces strict liability offences, creating criminal penalties for even inadvertent breaches, including for supplying DSGL dual-use technologies within Australia to foreign persons, including those already employed in Australia.   Many tech businesses have built their teams in compliance with current laws but now face potential criminal penalties or loss of critical foreign staff.   The 12-month transition period and permit processes for non-exempt countries offer some relief, but there’s uncertainty about permit application assessments, conditions, and integration with visa processes.  

The changes will create hurdles for innovative, non-traditional industry players who are essential for driving technological advancements. These unique non-market rules not only add to complexity and time, but they also massively drive-up regulatory compliance costs.

There is also the late-breaking $18.5 million federal government investment in quantum technology, a framework for the ethical use of generative AI in Australian schools and the introduction of the Digital ID Bill 2023. 

Technology Trends Generally

In the realm of technological advancements, Generative AI stands out as a transformative force, promising substantial economic benefits while simultaneously stirring debates about its impact on the job market. McKinsey’s projection of millions of job replacements and a contribution of up to US$4.4 trillion annually across diverse use cases presents a compelling case for its potential. Contrastingly, Gartner’s assessment suggests that Generative AI is at the pinnacle of ‘peak inflated expectations’ and is likely to enter the ‘trough of disillusionment.’ This apparent contradiction raises a crucial question: How can both these perspectives be accurate?

The Dual Nature of Generative AI’s Impact

McKinsey’s estimates reflect the massive economic potential of Generative AI. Its capabilities could revolutionize over 60 use cases, from automating routine tasks to enhancing creative processes, thereby contributing significantly to global economic growth. This transformation, however, comes with the potential cost of job displacements, particularly in roles that are routine and predictable.

Gartner’s analysis points to the typical lifecycle of emerging technologies. The initial excitement often leads to inflated expectations, which are then tempered by practical challenges and limitations in implementation. This ‘trough of disillusionment’ phase is a critical period of adjustment, where the hype gives way to more realistic assessments and sustainable development strategies.

Navigating the Generative AI Landscape

Our perspective posits that Generative AI represents an unprecedented investment opportunity in technology. The ChatGPT phenomenon, for instance, has sparked a flurry of innovation, with numerous entities attempting to leverage this technology, including government departments, SMEs and schools, who are likely to dive in on adopting ‘enterprise-grade’ generative AI solutions. However, the rush to deliver solutions often overlooks the complexities involved, especially in the short term.

Short Term Horizon

In the near term, Generative AI is poised to offer robust returns in areas such as knowledge worker tools. These applications, which enhance productivity and creativity in professional settings, are already showing promising results and practical utility.

Long-Term Horizon

More sophisticated applications of Generative AI, however, are likely to require a longer timeline for fruition—potentially up to five years. This includes areas like advanced healthcare diagnostics, complex problem-solving in various industries, and more nuanced and creative AI outputs.

Looking Ahead: Concluding Thoughts

As we chart a course towards 2024, the tech sector stands at a crossroads, facing pivotal shifts and emerging opportunities amidst a landscape of rapid technological change, regulatory uncertainty, and transformation.  To some extent — that is nothing new.  To another extent, the massively accelerated pace of change experienced in 2023 will only get faster in 2024.  For leaders and decision-makers in global tech businesses, the strategic context becomes less certain and less clear.

Whether it’s capitalising on a market inflection point through M&A, or realising the potential of technologies like Generative AI, or adapting to the influences of government policies, the key to success in 2024 lies in staying informed, agile and taking opportunities as they arise.  We look forward to being part of that journey, together with you.

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