Technology
Technology
Technology
Dealmaker, regulatory and competition trends in TMC M&A in the UK and Europe
- There has been a shift to a buyer's market, with value being paid out down the line and other associated trends
- Regulatory burdens in tech transactions are on the increase
- In response to the megadeals of the last decade, competition authorities internationally are tightening their regimes with jurisdictions introducing transaction thresholds
Despite a slowdown in the global M&A market, there is still a steady stream of transactions across the TMC sector. This is prominent in the mid-market where there is less reliance on debt funding. However, over the last year, there has been a slight shift to a buyer's market.
Rise of completion accounts
One of the trends has been an increased use of completion accounts versus "locked box" accounts. They are buyer friendly as they allow for a post-completion adjustment of the purchase price. By contrast, locked box accounts determine the price at completion and are, therefore, preferred by a seller.
Deferred consideration
There has also been an increased use of deferred consideration. With funds being tighter due to global economic factors, buyers are also taking less risk. This has manifested in greater use of deferred consideration or contingent earn-outs linked to future performance of the business, which delay payment of value to sellers.
This has been the case more recently in tech transactions where the technology may be at an early stage of its projected growth. However, in M&A in the media and creative industries, earn-out and contingent consideration have long been a feature of these types of transactions.
Deferred or contingent consideration is also being used to address discrepancies between buyers' and sellers' views on pricing. Pricing multiples had been strong – arguably too strong – across TMC businesses in recent years.
Less competitive pressure
A shift to more of a buyer's market means sellers are finding it harder to create competitive pressure. For sellers, it is, therefore, critical to keep sale processes tight and focus on execution risk.
As they have reduced more recently in many territories (with India as an exception - see "India's tech M&A activity set for 2024 in resilient and confident shape", buyers have been bridging the gap by offering a lower initial pricing multiple combined with contingent consideration which, if paid, would imply a greater overall pricing multiple. In private equity-funded transactions, reduced pricing multiples have also led to an increase in incumbent investors more regularly looking to reinvest in businesses that they would otherwise be exiting.
SPAs and regulatory burdens
There has been a significant increase in the regulatory burden on tech transactions. Companies now not only need to navigate merger control but also foreign direct investment control and foreign subsidies regulation.
This has increased the need for conditional share purchase agreements, with split signing and completion rather than a simultaneous signing and completion. This leads to additional negotiation, delays, costs and risk for sellers.
Merger control
Following the series of Big Tech megadeals in the 2010s, competition authorities have been on a quest to tighten their regimes. To that end, a number of jurisdictions have introduced transaction thresholds. These can help authorities ensure they catch transactions in which a target does not yet generate substantial revenue but already holds significant market relevance and the deal could have significant market impact.
A tool the European Commission has utilised is article 22 of the EU Merger Regulation. This allows Member States to refer the review of a transaction to the European Commission even though neither the European Commission nor the Member State originally had the authority to review it.
The referral regime applies if trade between Member States is affected and when there is a concern that the transaction could have a detrimental effect on competition. Since its policy shift, the European Commission has accepted article 22 referral requests in at least four cases: Illumina-Grail, Meta-Kustomer, Viasat-Inmarsat and Cochlear-Oticon Medical.
Foreign direct investment
A further power to review transactions that is being used significantly more is foreign direct investment (FDI) screening. Many regimes have been recently set up to assess a transaction's impact on national security and public order. Following the introduction of the EU’s framework that reviewed FDI screening and culminated in the FDI Screening Regulation, the number of Member States with national FDI regimes increased from 11 to 21.
There are ongoing initiatives by the remaining Member States, and it is expected that they will also introduce national FDI regimes. In addition, amendments are being made to existing national FDI regimes to either lower thresholds or widen case groups. Activities like cloud computing, artificial intelligence (AI), personal data and software for critical infrastructure regularly fall within the scope of those regimes. This means an assessment of FDI filing requirements is necessary in all tech transactions.
National Security and Investment Act
In the UK, due to the increase in the number of acquisitions that relate to acquiring AI technology, more applications are being made to the UK's Investment Security Unit to get clearance before completing acquisitions.
The government has recently announced a call for evidence to ensure that the regime remains effective and proportionate. It will be interesting to see if they amend any of the 17 specified sensitive areas that require mandatory notification. The potential new exemption for intra-group reorganisations would be much welcomed by companies and corporate lawyers alike.
Authors
Sara Valentine Partner, UK sara.valentine@osborneclarke.com
Mike Freer Partner, UK mike.freer@osborneclarke.com
Dr Sebastian Hack, LL.M. Partner, Germany sebastian.hack@osborneclarke.com
Marta Lao Lawyer, Spain marta.lao@osborneclarke.com
Ken Wilkinson Partner, UK ken.wilkinson@osborneclarke.com