Unlocking Success: The Power of Acquisitions During Market Downturns

Given the current market conditions reflecting lower deal volume and value in the information technology space, we will examine the performance of public technology companies that were acquisitive during times of market softness using 2008 as the reference point. This analysis aims to understand the potential benefits of engaging in mergers and acquisitions (M&A) during economic downturns and how it can contribute to the long-term success of these companies.

During economic downturns, such as the one experienced in 2008 and the present circumstances in 2023, company management and boards tend to be hesitant to make significant investments. [1] This reluctance stems from various factors, including a decline in lending capital and appetite, increased cost of capital, limited access to equity capital for buyers, and shifts in the supply and demand for deals. [2] Although market conditions in 2008 were driven by the Global Financial Crisis, the current challenges faced in 2023 are primarily caused from elevated inflation and the subsequent interest rate hikes. Nevertheless, the market softness from 2008 is comparable to what we are experiencing in 2023.

As depicted in the graph below, deal value is expected to see a substantial drop in 2023, resembling the decline witnessed in 2008. This decline can be attributed to reduced investor confidence, heightened risk aversion, and overall economic uncertainty. Furthermore, deal volume is anticipated to decrease even more significantly in 2023 compared to 2008. In both years, the implied revenue multiple declined compared to the previous year, with the median dropping 12% in 2008 and 18% in 2023. These trends indicate the challenges and opportunities present in the current technology M&A landscape.

Exhibit 1: North American Information Technology Deal Activity

The lower valuations and reduced participation in M&A activity creates an opportunity for well-capitalized companies to pursue strategic acquisitions. With decreased competition and potentially undervalued targets, acquisitive companies can benefit from attractive pricing and potential synergies. By acquiring competitors, these companies can solidify their market position, expand their customer base, diversify their product portfolio, and achieve growth through inorganic means. This strategic approach allows companies to navigate the challenging economic conditions and position themselves for future success.

The graph below demonstrates the positive impact of M&A during economic downturns. It shows that information technology companies with a market cap over US$2bn that completed at least one acquisition during 2008 and 2009, outperformed those that did not by an average of 3.7% annually over the next decade. The companies that took advantage of favorable M&A conditions during the Global Financial Crisis, such as Apple, Microsoft, Amazon, and Alphabet, are now some of the largest and most successful companies globally. Their strategic acquisitions during a market downturn played a significant role in their subsequent growth and dominance in the industry. Some of the more notable transactions include Google’s US$3.1bn acquisition of DoubleClick to bolster its digital marketing capabilities (March 11, 2008), [3] Microsoft’s US$1.3bn acquisition of Fast Search & Transfer to improve enterprise search functionality (April 24, 2008), [4] and Amazon’s US$1.1bn acquisition of Zappos.com to diversify its product offering and strengthen its brand (November 2, 2009). [5]

Exhibit 2: North American Information Technology Annual Shareholder Return

The same phenomenon seems to be reoccurring as several prominent players in the technology industry are currently capitalizing on the market conditions by actively engaging in M&A. Companies like Amazon, Cisco, Hewlett Packard, ServiceNow, and T-Mobile have already completed multiple acquisitions since the start of 2023. Although the pace may be slower compared to previous years, leading technology companies continue to pursue strategic acquisitions to enhance their competitive positions, expand their capabilities, and drive future growth.

[1] PwC: M&A Cycles: Fundamental Drivers and Valuation Impacts

[2] VonLehman: What Happens to Lower-Middle-Market M&A During a Recession?

[3] Business Insider: The 11 Most Important Google Acquisitions Ever

[4] GeekWire: Microsoft’s Largest Acquisitions, Led by the Blockbuster Deal to Buy Activision Blizzard

[5] Amazon: Amazon.com Acquires Zappos.com

[6] PitchBook

[7] S&P Capital IQ