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| Presented By RBC Capital Markets |
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| Axios Pro Rata |
| By Kia Kokalitcheva · Jun 04, 2022 |
| Happy Saturday, and thanks for reading! - 🚨 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
Today's newsletter is 840 words, a 3-minute read. |
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| 1 big thing: Cash squeeze puts spotlight on deals |
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| Illustration: Shoshana Gordon/Axios |
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| As the market downturn continues, we may see an uptick in merger interest, as venture-backed tech companies face a challenging fundraising environment. Why it matters: The frenzied startup financing that defined boom times also resulted in inflated valuations (at least relative to business realities) and expectations that the next round of funding would be just as easy as the last. - Alas, that's not where we are now, especially for mid- and late-stage companies most easily compared to their public market peers.
- It suggests companies might have to turn to deals with other companies to fund their ambitions.
The big picture: Historically, market corrections like the dot-com bust and the Great Recession have led to a drop in mergers and acquisition (M&A) activity and value, at least for a while. - During the Great Recession, for example, the number of U.S. tech deals dipped by 4% and the value by 53% between 2007 and 2009, and by 4% in count and 17% in value between 2008 and 2009, per Dealogic data.
- Even the onset of the pandemic two years ago led to a sharp drop-off in M&A, though it rebounded: 2021 set records.
 Data: Dealogic; Chart: Baidi Wang/Axios Between the lines: Volatile conditions can be a double-edged sword for public companies seeking to make acquisitions. - On the one hand, now could be a great time to nab some bargains as companies are looking for ways to survive. Bigger tech companies could make smaller "acqui-hires" of specialized teams, and may make strategic purchases to expand a business line or geography, or bolster its tech.
- But on the other, public companies don't have expensive stock they can use as currency.
- Also, they need to be judicious with the cash they have, especially as they attempt to minimize or avoid layoffs and dole out raises in the face of inflation and grumpy employees with less valuable equity packages.
Meanwhile: Some companies — the "B students," if you will — are also likely to turn to growth private equity investors for an infusion of cash in exchange for a majority stake. - They won't get the inflated valuations with sky-high multiples they expected before the downturn.
- But, assuming they have a decent business that has the potential to get into better shape, it can be an attractive route for some companies, said Battery Ventures general partner Chelsea Stoner, who invests in software makers.
The bottom line: With flush VC funding drying up, it's time to think about alternatives. |
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| 2. Exclusive: More funding for tiny M&A |
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| Illustration: Sarah Grillo/Axios |
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| MicroAcquire, a marketplace for mostly bootstrapped internet businesses, recently raised an additional $4 million in seed funding from its existing investors. Between the lines: The company's round extension was preempted by one of its investors, Interplay. Founder and CEO Andrew Gazdecki says he figured he should bank the extra cash while he could — something not all startups will get to do right now. The big picture: "In the past when startups would fail they used to just shut down. Even with great IP, paying customers, teams and more," Gazdecki told Axios in an email. - Now, the company is anticipating an uptick in businesses getting listed on its marketplace, as more seek a softer landing amid a rough market.
- So far in 2022, more than 460 companies have been acquired via its marketplace for more than $250 million in total value, according to Gazdecki.
- And it's not just MicroAcquire: Last month, Flippa (a similar marketplace) said that its listings have grown 46% year over year, with the average deal value reaching $4 million, a $1.2 million increase from the prior year.
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| 3. Yes, but: Uncle Sam is watching |
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| Illustration: Sarah Grillo/Axios |
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| As always, Uncle Sam's watchful eye could potentially cast a pall over deal-making. The big picture: It's no secret that Federal Trade Commission chair Lina Khan is concerned with tech industry M&A, both when it comes to huge deals and the small ones that tend to sneak by. - Now that she has a Democratic majority among the commissioners, she's expected to start working her way down her Big Tech to-do list, which includes more aggressive enforcement on mergers and putting out more stringent guidelines.
- And the FTC is not the only sheriff in town: The Justice Department is also keeping an eye on deal activity.
Yes, but: While heightened regulatory scrutiny does give pause to some acquirers, others have shown over the years that they're willing to keep making deals — unless and until somebody actually tries to stop them. |
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| A message from RBC Capital Markets |
| How ESG influences private equity dealmaking |
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| There has been an upsurge in environmental investment across renewables, infrastructure and many areas that affect the environment. Over 80% of limited partners state that they are, or will soon be, evaluating ESG as a major point of differentiation when deciding where to invest their capital. |
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| 📚 Due Diligence |
- Swoon in Private Tech Valuations Could Help Potential Buyers Like IBM (Bloomberg)
- Buying talent (Axios)
- Tech's deal-making cry: Damn the lawsuits, full speed ahead (Axios)
- Technology M&A values dive in Q1 even as volumes hit record (S&P Global)
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| 🧩 Trivia |
| Switching it up in this section again! - Question: What are your predictions for how this downturn will shake out? Is this going to be the apocalypse — are we looking at a dot-com or Great Recession situation? Or will this be a milder correction?
- Hit reply to this newsletter!
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| 🧮 Final Numbers |
 Data: Carta; Chart: Baidi Wang/Axios |
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| A message from RBC Capital Markets |
| 2021 brought record-high valuations in healthcare M&A |
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| The healthcare sector saw robust cross-border M&A activity in 2021, despite limitations on extensive due diligence. Here's why: About 50% of the volume came from biopharma, but other sub-verticals like medtech and services also played important roles. Get RBC's healthcare M&A outlook. |
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| 🙏 Thanks for reading! See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and tech M&A bankers to sign up. |
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