Get Ready for a Bonanza in Private Tech M&A
Lina Khan is impressive. She’s 33 and the Chairperson of the Federal Trade Commission. That’s no mean feat.
A legal scholar, her student article, “Amazon’s Antitrust Paradox,” was published by the Yale Law Journal when she was still there. The article argued that the focus of anti-trust laws was not broad enough. They were overly focused on keeping consumer prices down. That meant they did not fully take into consideration the anti-competitive nature of platform businesses. She proposed reforms in the article, which caused a stir in legal circles. They were innovative and comprehensive. Some were controversial. It is perhaps unsurprising that she is now tasked with taking down Big Tech.
In many ways, she is just another example of one of the many talented civil servants currently working in the US administration. This author is a huge fan of Janet Yellen of course but people like Gary Gensler of the SEC is no schmuck either. He’s been biding his time with crypto. Watch what he does over the next few months.
Lina’s first target is Meta’s acquisition of VR development studio, Within Unlimited Inc. Will she be successful? Time will tell. Meta has as many lawyers as it does lobbyists in Washington, and many think there were easier cases to win.
Will the threat of increased anti-trust legislation hurt the pace of tech M+A? Not necessarily. Even if the large public tech companies are hamstrung, PE firms and large VC backed private companies will be very active.
Long before Andreesen Horowitz coined the phrase “software will eat the world,” Robert F. Smith at Vista Equity Partners was acquiring enterprise software companies. The attraction of enterprise software businesses is the math. It is relatively easy to understand as is the potential opportunity for the business. His group also had the technical chops to work out whether the tech was truly scalable.
Partly because of his success, and also because they thought they could compete with the VC industry, Private Equity firms have been increasingly active in the software space. Global Private Equity M+A activity reached record levels in 2021, accounting for 27% of all global M+A value and 9% in volume, with 470 Private Equity investments worth a combined USD$225.7 billion in the technology sector.
This level of activity should increase. The enhanced focus by antitrust regulators on tech M+A paves the way for greater opportunities for investment by PE companies, including co-investing alongside strategic players where that is part of the antitrust solution. There will also be many opportunities to pick up companies from all the failed SPACs. Chamath, the “Warren Buffet of SPACs,” has seemingly moved on to pretending to be a stock market timer.
Large Private Companies: Buy vs Build?
It won’t just be PE firms that will keep investment bankers busy. There are plenty of VC backed private businesses that are big enough now to gain market share through acquisition. Carta is a case in point. Carta is a US-based technology company that specializes in capitalization table management and valuation software for start-ups. It was recently valued at USD$7.4bn!
The other week it bought one of its main competitors in the UK, Capdesk, for an undisclosed sum. The buy vs build decision was probably easy. Each jurisdiction has its own rules for cap table management, and it takes time to build a presence and integrate with other service providers like lawyers and accountants. Carta is increasingly working with public companies in the US, which used Carta when they were private companies. With so much going on, it was probably a no-brainer to find the biggest player in UK and buy it.
Australia: Opportunities galore?
The M+A theme will continue for the next 12 months, and Australia will be good hunting ground for large private companies that are looking to expand. The population is too small for the country to be a major focus as a market for a lot of US tech companies. Nevertheless, there are high quality domestic focused tech businesses, which would be a nice bolt on for a bigger global company in addition to companies, which legitimately can compete globally.
2021 was a busy year for tech M+A in Australia. Citrus Ad was bought by Publicis for USD$202 million. Invoice2Go was bought by Bill.com for USD$625 million. Clipchamp was bought by Microsoft. And of course, Afterpay, a truly global business at the time, was bought by Square for USD$39 billion. Surely the best ever trade sale ever by any Founder?
Cake Equity (www.cakeequity.com) was the first tech raise the author’s company did in Australia. Apart from the ability and technical chops of the Founders, one of the basic premises behind the investment was that if the company built out its business into the start-up ecosystem in Australia, it would be an acquisition target for either Carta or one of the incumbents. Only last year, Carlyle bid for Link in Australia.
It won’t just be cap tables that will be a focus, however. The Aussies have embraced prop tech like no other nation. Just compare the level of sophistication of their real estate CRMs with that in the UK, for example. They also have many great housing finance related tech companies as well as legal tech solutions that look like carbon copies of their counterparts in the US. All of them would be nice bolt on acquisitions.
There are also a handful of technology companies in the Ai space, that would be interesting acquisition targets. Won’t the next wave of enterprise software be all about making predictions from the data received? This newsletter thinks so.
Bottom Line: Don’t get too bearish! It promises to be an interesting 12 months.
