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Inside the Cross-Border M&A Monitor: Special Report

By February 24, 2021No Comments
Report Cover for Cross-Border M&A Monitor for the Tech Sector

While the COVID-19 pandemic slowed M&A activity in many sectors, few flourished like information technology (IT) in 2020. Worldwide social distancing measures forced countries to turn to virtual meetings, digital health consultations, and e-commerce like never before. As companies across the world shifted to virtual operations, dealmakers moved quickly to capitalize on the rising demand for IT services. 

At the same time, firms eagerly pursued cross-border M&A deals. Dealmakers rose above the pandemic’s challenges to register the same total cross-border aggregate value in 2020 as in 2019. Despite the surge in IT M&A activity and the healthy pace of international deal-making, cross-border carve-outs dropped by a third from their 2019 levels. 

Velocity Global partnered with PitchBook to analyze the trends that shaped M&A tech sector activity in 2020. The Cross-Border M&A Monitor: Tech Sector report takes an in-depth look into dealmakers’ motivations and actions, how the IT industry fared in 2020, and what firms need to know to approach 2021 with confidence. 

What Does the Golden Era of IT Deals Tell Us About 2020 and Beyond?

Understanding how the pandemic affected IT M&A activity in 2020—and how firms can expect the sector to fare going forward—requires historical context. 

Dealmakers logged an average of nearly 5,000 M&A IT transactions per year between 2015 and 2019. Cumulative deal value over that time was close to $3.1 trillion, making the period a golden era for IT M&A activity. The report outlines the drivers of this record-breaking period, which include: 

  • The rise of e-commerce
  • Advances in cloud computing
  • The expansion of B2B enterprise software
  • Increased demand for IT-specific segments like cybersecurity

However, deals plummeted sharply in Q2 of 2020 as the pandemic sent shockwaves through global markets. Dealmakers quickly and strongly resumed M&A activity in 2H 2020—a testament to the enduring demand for IT M&A in today’s increasingly digitized world. 

Firms looking to make educated decisions on the future of IT M&A activity must understand the drivers behind 2020 trends, including: 

  • Why dealmakers are willing to pay premium prices for the right deals
  • How deal values rise due to competition and consolidation in software, IT services, and telecommunications
  • What draws PE firms to the tech space, and how they bolster overall M&A volume

The report delves into the details of these circumstances, giving firms a clearer picture of where M&A activity is heading. 

What Are The Challenges of Cross-Border Expansion and Carve-Outs?

By analyzing IT M&A activity before and during the pandemic, the report identifies the main inhibitors of cross-border deals and carve-outs.

In 2020, firms proved that cross-border expansion remains essential to their growth plans. While 2019 set a new record with 1,551 cross-border IT deals, demand remained high in 2020—despite the challenges posed by the pandemic. Firms closed 1,326 deals last year, constituting nearly the same deal value as 2019.    

Even prior to COVID-19, cross-border buyers and sellers faced significant challenges. The report provides insight into three obstacles complicating international dealmaking, including: 

  • Recruiting and managing worldwide talent
  • Maintaining compliance with foreign labor laws and regulations
  • Quickly integrating new business units following an acquisition

Carve-outs present firms with specific complexities that extend beyond the pandemic. The report analyzes cross-border M&A deals under $25 million to conclude that COVID-19 alone is not responsible for the 33% drop in carve-outs from 2019 to 2020. Instead, the report identifies three challenges unique to carve-outs:

  • Navigating complex transition service agreements (TSAs)
  • Assessing the isolated financials of specific business units
  • Mitigating the risk to intellectual property (IP)

How Dealmakers Can Streamline Cross-Border M&A Activity With International PEO 

Despite the complexities of cross-border deals and carve-outs, firms still greatly benefit from engaging in mergers, buying out regional rivals, and acquiring new business units. The report outlines how turning to an International PEO (Professional Employer Organization) helps dealmakers reap the benefits of M&A activity while minimizing challenges by: 

  • Retaining employees during carve-outs 
  • Avoiding complex TSAs
  • Easily expanding their geographic footprint

The report concludes with a data-driven prediction about what 2020’s dealmaking resurgence means for 2021 and beyond. Read the full Cross-Border M&A Monitor: Tech Sector report to gain insight into the future of IT M&A activity—and learn how your firm can maximize the opportunities ahead.