Tech M&A will be ‘incredibly active’ in 2022, Union Square Advisors co-founder says

Union Square Advisors Co-Founder and President Ted Smith joins Yahoo Finance Live to discuss what to expect for tech stocks in 2022.

Video Transcript

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JULIE HYMAN: We've been talking a lot this morning about the selling that's been occurring in the technology sector. Now, let's talk about what that's going to mean for deal-making and financing in 2022. Ted Smith is with us now, Union Square Advisors co-founder and president.

Ted, thanks for being here. So obviously, there has been a lot of volatility within the technology sector thus far this year. Do you think that is going to force some decisions perhaps on the part of tech companies in terms of consolidation, for example, this year?

TED SMITH: Well, first, Julie, thanks for having me. And we certainly do think it's going to be an interesting year in tech as last year was. As everyone knows, last year was a record for technology M&A, with more than a trillion dollars worth of activity, up well more than 50% from the prior year. And we see that continuing in 2022. Corporate balance sheets are full there is a lot of money in private equity and venture capital funds. And despite the volatility in the market perhaps, we continue to think that deal activity is going to be incredibly active during the coming year.

BRIAN SOZZI: Ted, how hard is it to determine fair value for a lot of these tech names ahead of what will be perhaps a longer-term interest rate hiking cycle?

TED SMITH: That's a good question, Brian. What we're seeing is obviously in the public markets, with all the volatility that that creates day-to-day challenges, although we think that's going to settle out here as we get through sort of the next wave of Fed decisions and this round of earnings, which are obviously starting this week with a number of names, including Microsoft and IBM. In the private markets, it's a little more difficult because obviously, the private market valuations in some ways are pegged to those same public market valuations that we've seen so much volatility for. But again, as we see public markets settle out at least our belief as we move later into here into the first quarter we're going to see some better ability to fix valuations in the private markets.

JULIE HYMAN: You know, Ted, this is I guess more of a touchy-feely question so to speak, but you talk to a lot of executives, how are they feeling right now as we're seeing this challenging macro environment? I mean, the investors in the market who we speak to certainly don't seem panicked, they might seem concerned about growth areas, but they don't seem panicked. What about executives?

TED SMITH: I think that's a similar view at the executive level. Certainly, everybody keeps one eye on the market and we've all seen this volatility over the last few weeks and depressing valuations which as everyone I think knows also have been on the rise for a number of years. And so not so unnatural to see some compression here as we move into a slightly different cycle.

However, most tech executives with whom we speak feel very bullish on the prospects of their companies, feel very good about how they came out of the challenges of the pandemic and the resilience that those companies showed over the course of the last year and a half, two years. And so most of them are feeling quite good about the medium and long term prospects for their individual companies but acknowledge that the near term at least stock market challenges, to the extent that those have an impact on their companies, make for a bit of a bumpy ride.

JULIE HYMAN: And speaking of bumpy ride as well, something that has sort of receded into the background but it promises to rear its head again this year is regulation, and whether that's regulation of large-cap tech in terms of social media and how we view these types of companies, or maybe a bit more critical eye that regulators are taking towards mergers. What's the feeling around Washington right now?

TED SMITH: I think, generally speaking, the feeling is that it's still pretty much business as usual. Certainly, the largest players are going to be under increased scrutiny and will continue to be so. So the Metas, the Microsofts, the Googles, will certainly have that increased scrutiny as we go forward. That doesn't mean they can't get transactions done. It just means they may take longer or that the larger ones that they might desire to do are going to be more difficult.

But for the vast majority of the tech landscape who seek to pursue M&A, we believe that this current administration and the focus that they have will still allow for quite a bit of merger activity. And it's really only the very, very largest of players who may be affected by the stance that the administration is taking.

BRIAN SOZZI: Where do you see deals happening, Ted? Just given where valuations have fallen really across the spectrum of tech, is it more towards the software side or the content side?

TED SMITH: I think we certainly see it across the entirety of the tech spectrum but a tremendous amount of deal activity in software is our expectation. It continues to grow faster than any of the other sectors of technology, it's nearly $0.5 trillion in global annual spend across all of enterprise software. So a tremendous amount of transaction activity in software we think is going to be the norm again for this year.

JULIE HYMAN: Ted, thanks for being here. Really interesting stuff on what's going on within technology. As we see the selling, good to take a step back here. Ted Smith is Union Square Advisors co-founder and president. Appreciate your time this morning.