M&A tech landscape: A strategic move towards sustainability

This year extended the “tech wreck” that started in late 2022, crunching valuations across the board, especially for later-stage companies. Some Australian start-ups had to quickly get their money out of Silicon Valley Bank after the industry-leading lender went under, only for their deposits to be saved by the US Federal Reserve.

With valuations unlikely to surge in 2024, perhaps with the exception of generative AI companies, we’re zeroing in on two major themes.

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Firstly, we’re looking at merger and acquisition activity. We’re expecting a moderate uptick in 2024, building on the momentum gained in the latter part of 2023. The primary driver behind this trend is the imperative for companies to consolidate cash reserves and streamline operational costs in response to a more cautious investment climate. Strategic deals and consolidations present opportunities for cash-positive companies and struggling start-ups alike. Entities with financial stability can expand their market presence, acquire new technologies and enhance talent pools.

In Australia, fintech growth is prominent, backed by robust support from major banks. Australian fintechs are drawing significant attention in the investment community. Additionally, the quantum computing sector is on the rise, with government funding supporting initiatives like the Australian Centre for Quantum Growth to the tune of $18.5 million.

We also represent Australian companies with operations in the US and the UK, which have different narratives playing out. In the UK, the market shows a robust inclination towards software, infrastructure and transportation, as well as financial services technologies. Favourable innovation ratings, competitive tax rates, and ongoing foreign investment projects make the UK an attractive destination for tech investments, and we expect this to continue.

Meanwhile, in the US, horizontal and vertical consolidations are expected in the sector, driven by strategic acquisitions. External investments will scrutinise acquirers’ ability to demonstrate synergies and effective integration capabilities, with the state of interest rates influencing capital flow into growing tech companies.

The second major theme is capital raises, more specifically, so-called “down-round” investments, where companies raise capital at lower valuations. While there’s been a lot of speculation that an increase in these down rounds was, and perhaps still is, coming, we remain sceptical. The capitalisation tables in growth-stage companies make down rounds highly unattractive to founders – who seek refuge in convertible non-priced instruments like SAFES and convertible notes with long-dated expiries.

The role of government policies: Navigating regulatory complexity

A key element in the investment narrative for 2024 and beyond will be government policy, especially on the regulation of critical and emerging technologies used for defence purposes and those with dual commercial and defence-related use. AUKUS countries are increasingly taking a “walled garden” approach to defence and dual-use tech.

In just the last few weeks, Australia has moved legislation into Parliament under the Defence Trade Controls Amendment Bill 2023 to establish an export control regime comparable to the restrictive International Traffic in Arms Regulations (ITAR) regime administered in the United States. This regime, while touted to facilitate technology transfer between AUKUS partners (which is likely to be unidirectional, from the US, not bidirectional, in any event), would potentially stifle Australia’s capacity to act as a regional defence leader.

The bill also raises concerns given it introduces strict liability offences, creating criminal penalties for even inadvertent breaches, including for supplying Defence and Strategic Goods List (DSGL) dual-use technologies within Australia to foreign persons, including those already employed in Australia. Many tech businesses have built their teams in compliance with current laws but now face potential criminal penalties or loss of critical foreign staff. The 12-month transition period and permit processes for non-exempt countries offer some relief, but there’s uncertainty about permit application assessments, conditions, and integration with visa processes.

The changes will create hurdles for innovative, non-traditional industry players who are essential for driving technological advancements. These unique non-market rules not only add to complexity and time but also massively drive up regulatory compliance costs.

Generative AI: Balancing potential and realism

Generative AI emerges as a transformative force in technological advancements, with McKinsey projecting substantial economic benefits. However, Gartner’s cautionary analysis warns of the “trough of disillusionment” in the typical life cycle of emerging technologies.

In the short term, generative AI is set to offer robust returns in knowledge worker tools, enhancing productivity and creativity. Yet, more sophisticated applications may require a longer timeline, with advanced healthcare diagnostics and complex problem solving anticipated over the next five years.

Looking ahead: Strategies for success in 2024

As we navigate the uncertainties of 2024, success in the tech sector hinges on staying informed and agile and seizing opportunities as they arise. Whether capitalising on M&A, realising the potential of generative AI, or adapting to government policies, the key lies in rapid yet considered strategic decision making. The tech sector’s accelerated pace of change demands a proactive approach from leaders and decision-makers.

Anthony Bekker is the co-founder and managing director, APAC, of Australian-US-UK technology legal advisory Biztech Lawyers.