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This article has been written by Karan Shelke, pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

With the onset of corona pandemic, many sectors like banking, real estate and tourism suffered severe blows due to crippling demand. In the midst of the lockdown, masses were forced to work from home which had a positive effect on technology-driven-sectors. When traditional sectors saw a dip in M&A activity, companies in ed-tech, semiconductor chipsets, financial markets and e-health care were booming due to their unprecedented demand.

Automatically, any good investor will crave for a piece of it which presented itself with the onset of the pandemic. Investors placed their bets on the technology sector. Investors and existing technology companies invested by either merging or acquiring a sizable stake in the tech company.

Merger and Acquisition overview in the technology sector

In simple terms, merger and acquisition are done to achieve economies of scale by creating more value to the combined entity. The year of 2020 saw many mergers and acquisitions in the technology sector driven by demand for services which could defy the constraints of lockdowns via isolation and home quarantine. Some deals also saw major consolidation in a sector where there is a treat of elimination of competition posing future challenges. In this article, the author will list down 10 landmark deals in the technology sector, their intended outcomes and benefits and challenges of that transaction. 

Nvidia and ARM

The biggest acquisition deal of 2020 saw Nvidia, a company engaged in making power chipsets in semiconductor for PCs and laptops, acquire ARM with a total value of $40 billion. In future, the combination of Nvidia and ARM allows customers to combine both the products for better user experience. The acquisition will see Nvidia acquire shares of ARM from Softbank worth $21.5 billion in Nvidia common stock with an additional $12 billion in cash since Softbank were the majority stockholder in ARM. 

The deal will boost the financial synergy of Nvidia by an increase in market share and broader market access. Since both the companies are complementary to each other in products and services that they provide, certain market regulators across various jurisdictions have raised concerns. The semiconductor sector has seen many companies, either merging or getting bought has resulted in a consolidation of the sector. Recently, the UK’s Market Regulator announced that they will be investigating the takeover to determine the impact on all the stakeholders.

AMD and Xilinx

Another mega acquisition in semiconductor chipsets saw AMD acquire chip maker Xilinx for $35 billion. In its press release, AMD has stated that the acquisition was intended to expand the product portfolio and customer set across a diverse growth market which will increase AMD’s margins, earning per share and free cash flow. The acquisition is expected to help AMD compete with Intel which is itself a market leader in semiconductors. The challenges to the deal at present would be premature to decide. But as mentioned in the above deal of Nvidia and Arm, it will be interesting to see what the regulators will do while approving the deal.

Byju and WhiteHat Jr

Indian ed-tech saw a boom after the lockdown as a large student population were forced to study from the comfort of their homes. Many top tech companies like Google, Amazon, Facebook have invested in ed-tech with many set to be launched in the coming months. With a vast student population, India presents an opportunity for these tech companies. In August 2020, Bangalore based ed-tech unicorn Byju acquired WhiteHat Jr, an online coding school for young kids, for $300 million. Since WhiteHat Jr. has a good presence in India and US and has plans to expand to Australia, Canada and the UK.

The deal will certainly give Byju an increased market share and entry into a broader market which will, in turn, improve the company’s performance. WhiteHart Jr. was deemed as a capital efficient company on steroids with positive cash flows. With a booming Indian ed-tech market, Byju’s acquisition of an under-valued target in a market with many competitors is a strategic realignment by Byju.

S&P Global and IHS Markit Ltd.

S&P Global, a financial data mammoth acquired IHS Markit in a $44 billion deal. S&P Global provides debt ratings to companies and countries worldwide and is a major presence in the financial market. IHS Markit was formed in 2016 as a result of a merger between IHS and Markit deals in financial data and information services and competes with the likes of Bloomberg and Thomson Reuters. While the transaction is a horizontal acquisition for providing data on capital, credit, commodity debt market, it could likely face close examination from competition law regulators. Another acquisition of financial data provider Refinitiv (Thomson Reuter’s data division) by the London Stock Exchange was subjected to a long review process by the European Competition Commissioner in a $27 billion deal.

Facebook and Reliance Jio

Facebook’s acquisition in Reliance Jio saw RIL share prices hit a record high in early months of the pandemic when the market was still reeling from record losses. A deal which saw Facebook acquire 9.99% shares for $5.7 billion was made to connect local Kirana stores of India and WhatsApp. The acquisition will lead the value creation for both the companies and benefit the e-commerce sector in India. While the feature of WhatsPay and 30% cap for UPI transactions by NPCI can pose a challenge to a competitive UPI payment market, the investment was a major deal which followed subsequent subscription by other companies and private equity investors.

Salesforce and Slack

Salesforce, a fortune 500 company acquired Slack in a $27 billion deal. Slack, a Freemium software, provides communication platforms via chat rooms, messaging, private groups with additional sharing options in documents and files. Salesforce deals in customer service and personalised service business related to products in automobiles, sports accessories, Hospitality services, Travel services. Some companies require major customer service as part of continued product service given by them while selling their products. 

With acquisition of Slack, Salesforce has made a strategic acquisition in a bid to achieve economies of scale. By acquiring Slack, Salesforce can now create small private groups of company representatives in chatrooms to serve consumers by addressing their personalised requirements and complaints. With the continued presence of Mr. Steward Butterfield as the CEO and Co-founder of Slack under a Salesforce, the unit will help the transition of business as ‘end-to-end’ role in serving customers.

Facebook and Giphy

Facebook’s acquisition of Giphy at $400 million and subsequent integration with Facebook’s messaging apps and services are aimed at giving users better visual expression while messaging. As pandemic saw chats and private conversations shift on to phone screens, masses wanted to interact to express themselves in innovative ways. The acquisition can benefit Facebook in creating a more personalised experience while interacting with friends and family. The acquisition will strengthen Facebook’s positioning by giving them broader market access.

Zoom and Keybase

Zoom’s first-ever acquisition of security start-up Keybase in the company’s nine-year history would not have been a big surprise with Zoom’s woes with end-to-end encryption in video calls after its meteoric rise during the pandemic. Zoom was at the epicentre of this change when masses switched their meetings and conferences from physical halls and conference rooms to Zoom meetings and waiting rooms. Privacy and data leaks still pose a significant challenge in ensuring cybersecurity post even post completion of the deal. However, the acquisition was heavily influenced by the onset of pandemic and isolation and the need to have a secure platform while interacting.

Microsoft and Affirmed Network

Microsoft announced in March 2020 that they would be acquiring Boston based Affirmed Network. Affirmed Network is a company that has its specialisation in virtualization and cloud-based mobile network technology making it an attractive company for acquisition as an investment for the next-gen 5G connectivity. With 5G connectivity, a new market is set to come in the coming years and Microsoft’s acquisition is testament to a potential demand for better internet connectivity. With many companies already trying to set their footprint in 5G tech, it will be interesting to sell how it rolls out in the upcoming years.

Zynga and Peak Games

Turkey’s first billion-dollar start-up was acquired by the maker of popular games like Candy Crush and style mobile gaming apps like Toon Blast and Toy Blast for a sum of $1.8 billion that was structured in $900 million in cash and $900 million in shares of Zynga. With a pre-existing acquisition of $100 million in the year 2017, Zynga got control of the two popular titles among many and they did not have to develop them from scratch like that of Toon Blast and Toy Blast that have over 12 million active users. This will help them expand their business of advertisement as well and give them broader market access. Gaming platforms have seen a boom during the pandemic with an average user spending more time in gaming, Zynga’s acquisition is aimed to accelerate growth in the very competitive gaming industry.

Conclusion

For most businesses, 2020 was a challenging year but for big tech, it was an opportunity in crisis. With people stuck at home, big tech’s services saw an unprecedented demand. Taking advantage of good revenue forecasts, it was the perfect time to invest in rising tech companies. Tech companies went on a spending spree in the later half of the year to acquire companies and startups which will add to their financial performances and give them broader market access. Some transactions may end of facing uncertainty from a regulatory perspective due to the accumulation of vast data sets by tech companies. However, the pandemic was a realisation for everyone on the importance of the tech sector in fuelling innovation during a crisis. Any miscalculated clampdown by regulators can suppress the spirit of innovation under the garb of competition. Regulators should refrain from adopting ‘one size-fit-all-approach’ especially in digital markets which are prone to change and dynamism. 


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