Tech sector merger and acquisition activity is heating up again after a year-long economic freeze, punctuated in March by the alarming collapse of Silicon Valley Bank.
IBM announced in January it would acquire Advanced’s mainframe modernization unit for an undisclosed sum, expanding a portfolio that includes the $4.6 billion purchase of business management software company Apptio announced in June.
“We completed nine acquisitions this year, including Apptio, and we recently announced the acquisition of StreamSets and webMethods from Software AG, which we expect to close midyear,” IBM Chairman and CEO Arvind Krishna said during a January earnings call.
IBM’s recent acquisitiveness reflects a broader industry trend, James Brundage, EY-Parthenon Americas strategy and transactions technology, media, entertainment and telecommunications sector leader, told CIO Dive.
Tech M&A volume and value jumped during the second half of the year, teeing up an expected surge in 2024, according to EY’s market analysis. The professional services company forecasts private equity deal volume to be up 13% year over year and corporate M&A to increase 12%.
“I think tech will be up at least at the same level if not more," Brundage added. But sentiment isn’t always easy to read.
“Sometimes M&A can almost be like animal spirits — it’s like, are people feeling confident or not,” Brundage said.
A rekindling of M&A activity among tech providers can give CIOs a chance to weed out complexity in the tech stack, as critical services move under a single provider. Companies can consider joining the fray, acquiring a vendor to bring skills and technology in-house.
Vendors can also integrate complementary capabilities through strategic acquisitions.
“The combination of Cisco and Splunk will create an end-to-end data platform to enhance our customers’ digital resiliency with our complementary capabilities in AI, security and observability,” Cisco Chair and CEO Chuck Robbins said, during a November earnings call.
The optimization opportunity
Trends in M&A inevitably have a downstream impact on CIOs and their IT estates, as product licensing, servicing and delivery modes change under new management.
Upticks in M&A can create optimization opportunities as companies struggle with shadow IT, system interoperability and the complexity of hybrid cloud, according to Brundage.
“If you’re getting a mandate from your executive management team to cut costs, a good way to do that is to go with an integrated player that touches a whole bunch of different technologies,” Brundage said.
CIOs can also use the change in vendor alignments to eliminate redundant licenses and overlapping infrastructure services.
“Budget stakeholders are looking to centralize spending around key vendors that offer broader sets of products and solutions,” Forrester said in a recent report. The analyst firm expects large software vendors to accelerate M&A in an effort to layer additional capabilities into existing products.
Consolidation is a double-edged sword. As M&A activity tightens solution integrations on the product side, it can elevate the risk of vendor lock-in for customers.
“You have less leverage when you’re dealing with one of the large vendors than you get with a small provider, so you may end up with less favorable terms on contract negotiations,” Brundage said.
Customers who have had success influencing product roadmaps with individual vendors aren’t likely to carry the same sway with bigger players, Brundage said.
The impact of AI
Macroeconomic resilience isn’t the only driving force behind M&A.
Buoyed by generative AI enthusiasm, major vendors are racing to embed the technology either through partnerships or by bringing capabilities in-house.
“We’re seeing a whole bunch of what we call 'tech-and-talent transactions,' where companies that realize they don’t have the technology or the talent to utilize or build generative AI capabilities make a strategic decision to go out and buy it,” Brundage said.
Some of the AI-related activity has been characterized by smaller deals in which a company adds a group of engineers by purchasing a startup in order to onboard technical talent and develop AI capabilities.
“Size is not a criteria,” IBM CFO James Kavanaugh said of the company’s M&A strategy in January.
IBM’s focus is on adding capabilities that align with its broader hybrid cloud and AI strategy, Kavanaugh emphasized. “Those targeted areas are always centered around hybrid cloud, data, automation, security and oh, by the way, both software IP assets and consulting expertise,” Kavanaugh said.