Our view is that the pace of Technology M&A will slow dramatically in 2022 as bond yields rise. As we wrote recently, the forthcoming Fed interest rate hikes will not be sufficient to curb inflation, but these modest, incremental increases in the Fed Funds Rate over the course of 2022 and 2023 will lead to depressed valuations and thus fewer Technology M&A transactions.
The NASDAQ has far to fall after a decade-plus of easy monetary policy. Recall that Fed Chairman Powell not only took the effective fed funds rate to zero, but pursued other stimulative policies in 2020 and 2021 that far overshot the Fed’s core mandate of stabalizing the capital markets. Many NASDAQ high-flyers in our view could fall by 70-90% with the average NASDAQ component company 40-50% overvalued.
How does this play into M&A? Private companies always lag publicly-traded companies from a valuation standpoint when it comes to adjusting valuations due to market conditions. Whether they be founder-owned and operated companies, or venture/PE-backed companies, private companies are always slow to accept valuation haircuts despite what has occured in the public markets from a valuation perspective. Thus, Public-Private M&A transaction activity ought to drop significantly until private companies adjust to the forthcoming “new normal” Market and Enterprise Valuation multiples. Public-Public M&A transaction activity on the other hand ought to remain reasonably healthy.