The Italian technology M&A (“Tech M&A”) scene is experiencing a dynamic transformation.
Tech M&A: The Rising Trend
In the world of Tech M&A, Italy made waves in 2023. The numbers tell an impressive story, with a substantial increase of the total value of deals compared to 2022. Italy's tech M&A market is buzzing with activity, and the question is: what's fueling this remarkable rise?
The Driving Forces
Several factors are propelling Italy's Tech M&A market forward:
- Diverse Landscape and Consolidation: Italy's tech industry features a diverse landscape, with both established giants and innovative startups coexisting. Larger tech companies are actively seeking to enhance their capabilities in areas like Cybersecurity, Cloud, and Data, while also aiming to secure their IT expertise. This push towards consolidation is driving a significant uptick in M&A activities.
- Seizing Growth Opportunities: Italian companies are capitalizing on growth opportunities to remain competitive. In an era where tech innovation is the key to staying competitive, businesses are using mergers and acquisitions to position themselves at the forefront of the technological innovation.
- Emerging Confidence: despite global uncertainties, Italy's Tech M&A market exudes confidence. In fact, the resurgence of M&A, even as some players adopt a cautious approach, reflects a growing belief in the sector's potential.
- Reflecting Global Trends: the practice of tech giants acquiring smaller, innovative companies is a global trend. This strategy is mirrored in Italy's tech market, as companies recognize the strategic value of such acquisitions in driving their growth.
- Institutional Investors: Tech M&A is becoming a key market also for venture capitalists and private equity firms. Investors bet on the scalability and growth potential of the technology at hand, by considering market trends and forecasts, as well as (particularly for private equity firms) the potential value creation in combining said technology with the one already owned by other portfolio companies.
The Legal Perspective
“From a legal perspective, the main feature that makes Tech M&A different is the nature of the assets involved” said Francesco Adami, Head of van Berings’ Corporate and Securities Team “this peculiarity may materially affect the structuring and implementation of an M&A deal in different ways, from the valuation stage and the due diligence process, through the negotiation phase” he added.
In fact, the primary value driver of tech acquisitions is the intellectual property owned or relied upon by the target company. It may be a patent, a software, proprietary source codes, algorithms, formulae, datasets, as well as “simple” know-how, just to mention a few possibilities.
The nature of the assets involved influences the valuation methodology applicable to the target company. Being the real value of the target company represented mainly by intangible assets (i.e. IP rights), the use of traditional valuation methodologies can result to be biased and, therefore, unsuccessful. As already mentioned, the scalability, growth potential, and combination capabilities of the IP at hand are key factors to be taken into account.
A proper due diligence exercise on the target IP rights is crucial too. This is to assess, in particular: (a) if the target company’s IP is correctly identified; (b) if said IP - whether registered or unregistered - is in any way encumbered or infringes any third-party rights; (c) the target company’s title and rights on said IP; (d) the existence of potential litigation threatened or pending on said IP; (e) if adequate policies and clauses are in place to allow the target company to exclusively benefit form its employees’ or collaborators’ inventions.
The due diligence results will help shape an ad hoc package of representations and warranties, as well as ancillary securities. The aim is to secure the acquirer (to the larger extent possible) from losses possibly arising out of “defects” of the IP, such as: lack of ownership title, existence of encumbrances, infringement of third-party rights, breach of data protection or cybersecurity regulations, and similar.
An additional element to be possibly dealt with in the context of Tech M&A is that of the target company’s key employees, particularly if the target company runs a strong R&D activity. The acquirer, in fact, would wish to retain said key employees and this should be addressed and managed through proper contractual provisions and covenants.
Conclusion
Italy's Tech M&A market in 2023 has experienced a remarkable transformation. With a rising wave of deals and impressive figures, the tech industry in Italy is evolving at a rapid pace. Companies and investors operating in this sector recognize the potential for growth and innovation and are actively participating in shaping the future of tech through their vibrant M&A activities.
van Berings counsels its Clients through the whole investment life-cycle. At a very early stage, we help our Clients with the deal structuring and offer them tailored legal due diligence services to properly assess the target company. At a later stage, we provide legal advice on contractual negotiation, as well as on post-acquisition integration and possible divestments.
