AI and Inflation Concerns Lead to Cooldown in Tech M&A Activity

This year, bankers and lawyers providing merger and acquisition consulting services for tech companies have not met their previous high expectations. Some bankers and lawyers attending the annual conference of the Tulane University Institute of Business Law in New Orleans revealed that one of the main reasons is that corporate executives are worried about being replaced by artificial intelligence, which has caused them to hesitate in making M&A decisions.

Scott Bashai, chairman of Bowies Law Firm, stated during a panel discussion, “Many of my clients have currently paused their M&A transactions because of uncertainties about how AI will impact their own businesses and potential acquisition targets.” This New York-based law firm has long provided legal services to several large corporations, including some tech companies.

However, bankers say that in one area, AI has actually created a positive environment for M&A activity: there has been a significant increase in market interest in acquiring companies dedicated to addressing the near-infinite demand for energy and computing power driven by AI. Some recent deals involve data center developers.

So far this year, the total announced or completed tech M&A deals have reached $375 billion. But about two-thirds of this volume comes from a single large transaction: Elon Musk’s SpaceX acquired its AI lab xAI for $25 billion.

Meanwhile, the number of deals is expected to be lower than last year’s total. In the first quarter alone, 735 companies completed mergers or acquisitions, with either the buyer, seller, or both being tech firms; last year, the total number of tech M&A deals exceeded 4,133.

Of course, AI is not the only factor causing a slowdown in M&A activity. Stock market volatility makes it difficult to price potential deals. Additionally, potential buyers are concerned that conflicts involving Iran could trigger a surge in oil prices, which would push up interest rates and increase borrowing costs for financing acquisitions.

Some deals relying on debt financing have already fallen into trouble. For example, software company Qualtrics’ plan to acquire data analytics firm Press Ganey Forsta has stalled because multiple banks, led by JPMorgan Chase, have suspended negotiations with investors over the $5.3 billion acquisition loan.

Furthermore, the crisis at Blue Owl Capital has impacted another key acquirer in the tech sector—private equity firms. Blue Owl and other private credit companies are major financiers in private equity acquisitions, but some funds are experiencing large-scale redemptions, limiting their financing capacity.

However, there are bright spots in the market. Stephen Feldgos, head of global M&A at Goldman Sachs, stated in his keynote speech at the Tulane conference that the power generation sector now has the mature conditions for numerous M&A deals, as the industry is currently experiencing a “severe power shortage.”

Related deals have already been completed this year: UK cloud service provider Nscale agreed to acquire American Intelligence & Power, which is building a data center campus in West Virginia, USA. In early March, a consortium of investors including BlackRock Global Infrastructure Partners and Swedish private equity firm InTao Group agreed to acquire energy supplier AES for approximately $10.7 billion in cash.

Bankers and lawyers attending the conference expect that in the coming months, more acquisitions of companies providing supporting services for AI data centers will occur, including energy suppliers, real estate firms, and liquid cooling technology providers.

The sharp decline in software stocks triggered by AI has also created a new demand for bankers and lawyers: helping companies respond to activist investors. These investors, sensing opportunities after some companies’ stock prices plummeted by 70% or more within a year, are expected to buy into enterprise software firms and pressure them to sell assets.

In early December, Starboard Value Fund acquired a 5% stake in technology services provider Clearwater Analytics and urged the company to sell. Later that month, Transatlantic Investment Group and W Capital Partners took Clearwater private in an $8.4 billion deal.

Bankers say that other companies that are vulnerable targets include HubSpot, whose stock has fallen over 50% in the past 12 months, despite some recovery in the past month.