M&A Activity: Tech Acquirers and AI Solutions

Private equity and traditional tech acquirers are increasingly active in acquiring venture-backed technology companies, driven by optimism and a rise in M&A activity.

### Tech M&A Trends and Outlook for 2022
* 📈 " "There's a lot of optimism in the market right now," with three major groups of acquirers for venture-backed technology companies: **private equity**, **traditional tech acquirers**, and **non-traditional tech acquirers**.
* 💸  Private equity firms, despite the rise in interest rates, have become **increasingly active** in the first two quarters of this year.
* 💰  Traditional tech acquirers that sat out the first years of the boom are now more willing to **spend cash at current levels**.
* 💡 " Any buyer that loses sight of **founders' and boards' sacrifices** isn't understanding the company that they're buying.
* 🛍️  Non-tech companies in various sectors are increasingly acquiring tech solutions, such as AI, to **stay competitive**.
* 🤖  While many companies are adding AI to their products, there's not enough consolidation happening at the fundamental AI platform level due to the **limited number of such companies**.
* 🔮  Despite significant investments in AI and AI platform companies, there is a **lack of exits and consolidation** at the platform level.

It's been an interesting few weeks, actually, in the world of M&A, particularly when I speak to venture capitalists. They might actually be more upbeat than some of their later stage venture-backed companies are more likely to be acquired than go public. That there is kind of some energy there. Is that something that you see from your desk as well? Yeah, I think that's exactly right. I think that there's a lot of optimism in the market right now. If you look at the last 3 to 4 years, you obviously had a massive uptick in 21 and 22, and that dropped off precipitously with valuations dropping in 22 and 22, all of 2023, and to some extent at the beginning of this year. And we have, you know, probably three major groups of acquirers that will acquire venture-backed technology companies. You have private equity, traditional tech acquirers.

And what I like to refer to as non-traditional tech acquirers, those are older industries. You know, looking at private equity, obviously the rise in interest rates made them nervous. But if you go back in history, private equity is very used to operating at double-digit interest rates. So have they dusted off their old playbooks, reminded themselves, how do we do this again? Absolutely. And they've become increasingly active in the first two quarters of this year going to traditional tech acquirers. A lot of them sat out the first couple of years of the boom. They didn't want to spend cash at that level. They didn't want to, you know, use the. Let me. Sorry. Go ahead. No, no, I'm sorry. I just wanted to jump in and ask about you know, there's the mechanics of it using cash. I particularly understand the private equity side of that equation.

There's also like a little bit of a psychological side of any transaction. What's interesting about your firm is you're on both sides of the table, right? Buyer and seller. What are attitudes right now to sitting down and hashing out a deal? Yeah, I mean, I think one of the things that we work with our clients right now a lot on is both for traditional and non-traditional traditional tech acquirers, understanding the mindset of founders and of boards. You know, in a lot of instances, these are companies that were two individuals in a garage. They've grown their companies to multibillion dollar companies, but along the way, they've underpaid themselves. They haven't bought houses, they haven't gotten married, they haven't had children. You know, they haven't gone on vacation. And any buyer that loses sight of that isn't understanding the company that they're buying. So something really interesting is

happening in what I would call non-tech
companies as well, right. This idea that in a world of AI, for
example, as we just discussed that new Kleiner Perkins fund, you've got to have
some sort of it or your investor base so your employees won't believe you and
they'll leave. And I see that happening in all kinds of
sectors. You know, oil and gas, utilities, even construction, saying,
oh, we better buy a solution here. That must be a boon for business, too.
That's exactly right. And you really have two separate things
going on here. So first, speaking specifically to AI,
I think it's a mischaracterization to say that there's a lot of AI M&A activity.
There aren't enough AI platform companies for there to be consolidation.
Now, there are a lot of companies that do something else.
They do cybersecurity. Maybe they are in our platform.
Maybe it's a fintech company.

You know, are they adding AI to what
they do to improve their products? Absolutely.
Those products are getting smarter. They're going faster. They're more
attractive to their customer base. But those aren't fundamental AI
platforms. You know, on the flip side, the
other thing that we're seeing is a lot of, as you said, some nontraditional
tech acquirers come deeper into the tech space.
Another area where they're doing that is cybersecurity.
If you go back to the beginning of the pandemic, everybody may remember there
was a massive pipeline hack on the Eastern seaboard that woke up a lot of
the oil and gas companies to say, we have not invested enough in technology,
we've not invested enough in cybersecurity and protecting these
infrastructure projects. And so a lot of companies, in theory,
could build those solutions or cybersecurity solutions.
But some older industries are not equipped to do that.
So what do they do?

They go out and buy them wholesale.
They buy a company to create a product just for them.
And so that's what a lot of some of these older industries. It could be oil
and gas. It could be agriculture. You know, to some extent, even banking
is still behind the ball for some of these technologies.
Ali, what you just said on consolidation is really interesting.
It almost contradicts kind of what we'd been hearing, what I wrote about a few
weeks ago, which was based on comments from hugging face that, you know,
hugging face is a platform that hosts loads of large language model providers
and the smaller players needed help. They've run out of cash.
It's an expensive enterprise. You seem to be saying that actually at
the platform level that isn't happening because there aren't enough platform
level providers right now. Just give me a bit more on that.
Yeah. So to be clear, there is a ton of
investment going into AI and AI platform

companies 100%, and I think you see that
with the Kleiner Perkins fund that was just announced, but.
What you're not seeing is the exits. There aren't enough of those companies
for there to be consolidation. Yes, absolutely.
There are some, but not to the volume that you see in other subsectors of
tech.

M&A Activity Trends in Tech and AI

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Bloomberg Technology

The Current State of M&A and Venture Capital

Venture capitalists are more optimistic about acquiring later stage venture-backed companies than going public.

There has been a significant uptick in acquisitions in the first two quarters of this year, driven by private equity, traditional tech acquirers, and non-traditional tech acquirers.

Private equity firms, despite being nervous about rising interest rates, have become increasingly active in acquisitions, while traditional tech acquirers are now more willing to spend cash at a high level.

The Current Attitudes Towards Business Deals

Firms are now focusing on understanding the mindset of founders and boards, especially in the tech industry, where many have sacrificed personal milestones for company growth.

The importance of having some form of AI or technology integration is becoming prevalent across various sectors to retain both investors and employees.

However, there is a misconception about the level of AI merger and acquisition (M&A) activity due to a lack of AI platform companies for consolidation.

The Impact of AI on Product Development and Tech Acquisition

AI is significantly improving products, making them faster and more appealing to customers, although it's not yet at the fundamental AI platform level.

Non-traditional tech acquirers are increasingly entering the tech space, particularly in cybersecurity, with older industries opting to acquire companies to develop products for them, due to being unequipped to build their own tech solutions.

The investment in AI and AI platforms is substantial, but there is a lack of enough providers at the platform level.

The Kleiner Perkins fund has been announced with a focus on tech companies, but there is a lack of exits for consolidation.

This is different from other tech subsectors that experience a higher volume of company consolidation.

This lack of consolidation poses a challenge for the tech industry.