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When the financial fantasyland of 2021 came to an end, the rivers of cash that had been flowing into the tech ecosystem also largely dried up.
But as the final quarter of 2023 fast approaches, money is beginning to stream once again. And just like leaks in a dam, it could signal that a much bigger flood is about to happen.
After the three biggest initial public offerings in the tech sector in nearly two years raised more than $6 billion collectively in less than a week, Wall Street on Thursday received news of the type of mega-acquisition that the tech world has been lacking. Cisco Systems Inc.
CSCO,
announced its intent to buy big-data software company Splunk Inc.
SPLK,
for $28 billion, a valuation Splunk hasn’t sniffed since the end of 2021.
For more: Here’s why Cisco is spending $28 billion to buy Splunk
While a handful of tech IPOs and one big-money acquisition wouldn’t have been much cause for celebration in previous years, they are desperately needed after the unsustainable spike of pandemic-era investment crashed back to earth last year. The IPO market for tech was effectively shut down until Arm Holdings
ARM,
Instacart
CART,
and Klaviyo
KVYO,
pried the window open in the past week, and merger activity fell by more than a third last year, a total that was artificially boosted by Microsoft Corp.
MSFT,
and Activision Blizzard Inc.
ATVI,
taking until January 2022 to announce their megamerger.
“You’re starting to see the freeze thaw,” Wedbush Securities analyst Daniel Ives said in a phone conversation with MarketWatch, adding that “the Arm IPO combined with [Cisco’s] megadeal is just the tip of the iceberg.”
Arm IPO: 5 things to know about the chip designer central to the AI transition
Ives estimates that there is $2 trillion to $3 trillion sitting on the sidelines, mostly held by Big Tech and private equity, and the fascination with artificial intelligence and fear of missing out on an expected surge in that technology will lead to much more. He predicts “the biggest transformational spending wave that we’ve seen in 30 years, since the internet in 1995.”
“It’s the fourth industrial revolution that’s playing out, and its AI-driven. Strategically, companies can’t just sit around and wait,” he said. “There’s a window where if they don’t get aggressive, they’ll miss out on this next wave. ”
See also: Will Nvidia stock be like Apple or Cisco in the AI era?
And it won’t just be acquisitions or IPOs. Many of the large tech players are dumping money into AI startups, such as Nvidia Corp.’s
NVDA,
recent investment in Databricks and a wave of AI investment from Salesforce Inc.
CRM,
Those moves mirror the one that gave a jolt to predictions of an AI era beginning for tech: Microsoft’s investment in OpenAI and integration of some of the company’s technology into its own offerings.
After all, those moves involve a lot less work than the massive tech mergers that have been more closely scrutinized by regulators recently. Microsoft and Activision are still working to close their deal, and the other huge merger of 2022 — Broadcom Inc.’s
AVGO,
$61 billion deal for VMware Inc.
VMW,
— is also still trying to get to the finish line. Tech companies may still be hesitant to do megadeals, but it seems like the window for some strategic M&A is open.
The IPO window is also open, though with some qualifiers. Investors will want to hear about a company’s growth trajectory and how they will be able to compete in a market that will still be dominated by Big Tech players like Apple Inc.
AAPL,
and Alphabet Inc.
GOOGL,
For more: Instacart is another sign of life for the IPO market
“The appetite’s increasing for the right [IPO] stories,” Ives said. “Investors have a higher bar in terms of the appetite, but they want to play growth industries and assets that are unique. You can’t just paint [startups] all with the same brush.”
There are still plenty of potential potholes in tech’s path. Wall Street will want to see results from the current wave of investment in generative AI beyond Nvidia’s hardware sales, and if the three newest tech stocks struggle for gains in the months ahead, as they have in their early days, there could be hesitation to welcome more IPOs to the market. Venture investors beyond Big Tech will want to see more M&A and IPOs to ensure there are exit paths for their money.
As it stands, though, the tech-money spigot is shooting out billions of dollars again. As long as the current path stays straight, there should be plenty more to come.
