Today, an unfortunate term frequently appearing in the news is the tech layoff, referring to companies making mass firings.
These layoffs are directly related to the global economic crisis, with widespread price inflation and rising interest rates. If you are unfamiliar with those terminologies, I simply refer to the most didactic video I’ve ever seen that explains it in a way that reminds a CBN broadcast.
Going back to the question, what are the roots of the startups’ mass layoffs worldwide?
Less interest and more money in the market do not mean better economy
Many recent events, such as the COVID-19 pandemic, have deeply shaped our world; for tech specifically, I will highlight the following:
- Lower interest rates. Those who previously relied on a fixed income are willing to take more risks with variable and high-risk investment options; the public stock market and venture capital are key financial products in this market
- The acceleration of customer adoption of digital tools. Your parent’s and grandparents’ Zoom calls with the family are the best example of this
So going back to the statement: less interest = more money in the market = more the economy moves. Right? Up to a point, yes. However, a potential side effect of those listed factors is runaway inflation, when prices rise at a rate that dramatically accelerates.
Let’s look at a hypothetical example, Henrique Tormena Carrot Cake House:
- Before, an average of 50 people bought carrot cake. Next, demand is increasing; now it’s 200 people. In that case, I’m going to increase stocks, buy more raw materials, and hire more people to scale it. But if prices rise, e.g., the carrot is more expensive, I need to “earn more.” So I need to raise my price too
This type of behavior affects the whole production chain. In tech, it is no different:
- More people are buying our software/app and demand is increasing. I’m going to increase “my stocks,” so let’s hire more people. Are prices going up? Mine will go up too
Startups’ valuations rise
It is precisely this effect that we’ve seen in the valuation of startups. The price went up. Investments in tech companies have increased a lot. Companies took the opportunity to raise new rounds and make IPOs and follow-ons. The money comes directly via growth plans that include expansions of the current operation, as well as new directions, ranging from
- Geographic expansion to new cities, regions, countries
- Product expansion, new solutions, and businesses
- Acquisitions (M&A) and investments (CVC) in other startups
- Moving to other models that require an increase in resources and justify the need for capital
In general, in the low-interest scenario, startups have more funds because Venture Capital do too. And Venture Capital has more money because investors have more appetite for risk.
Less interest is equal more money for startups
When interest rates are low, safer investments are less profitable, opening the faucet for riskier investments. Companies then started to receive more money, which was especially marked in Brazil because, historically, the country lived with higher interest rates, and the Venture Capital market is growing as an asset class.
Between 2020 and 2021, we saw a boom in IPOs, venture rounds, and many acquisitions by tech companies. Several funds were founded in this period as well.
But if interest rates rise…
What happens when interest rates increase? Less risky financial market products pay better. Government or large company bonds pegged to interest rates also start to pay better when rates are higher. From an investor’s point of view, this is when your basket of riskier assets starts to look too heavy, and given that the returns on safer financial products are more attractive, money begins to migrate). In the world of startups, Venture Capital is the primary funding source, mainly private companies, which do not have access to credit with the banks or trade shares on the open market).
A Venture Capital fund also has its investors. And to satisfy these investors, a venture capital product has to deliver more return because the product’s risk is higher than fixed-income security. In a rising interest rate scenario, Venture Capital needs to deliver even more, which usually means being more diligent with potential investments, and demanding more from startups (better metrics, more capital efficiency).
The market is not binary. The fund will still invest, but it will be more diligent in the process. The Venture Capital investor will allocate capital but be more diligent. Companies will raise money but must prove that they can adapt to the new conditions. Those willing to step on the accelerator in a low-interest-rate scenario may need to revise their plans.
If a startup is less attractive, does it costs less?
The two charts below show the top 10 US companies in saas/cloud, looking at the company’s market value by projected revenue (also known as a revenue multiple). The one on the left compiles recent data from Nov/2022. The one on the right uses data from mid-Nov/2021.
In short, a year ago, the top 10 companies with the highest revenue multiple traded at an average of 57x their projected revenue. Today, that value is almost 80% lower than it was a year ago.
In essence, a lower valuation means these companies are cheaper (or less expensive). However, it also means that the cost for them to raise capital is higher. It is more difficult and more expensive to bring investment in-house. So, how can they keep the business operating in a cash-burn scenario? Reducing the burning is not just an obvious alternative. It’s often the only one.
In the end, it is necessary to balance the accounts
In our carrot cake example, if the number of people willing to pay R$10 for a carrot cake decreases, I will sell less. On the other hand, how do I keep my business standing with fewer sales? Simply put, I need to have fewer costs.
In tech, the highest costs are personnel, the main expenses in marketing and sales, administration, and research and development related to people – and part of the operating costs too. Layoffs emerge as a (quite tough) alternative to balance the accounts. The reality is that companies don’t get from small startups to big techs like Stripe and Twitter without making tough decisions.
A scenario of 8% inflation means one month less cash burn per year. Macroeconomic scenarios are challenging to predict, but they influence the plans for many production chains, and technology/saas/cloud/I.T. is no different.
This article does not intend to give an opinion on any measure (including layoffs) taken by startups or investors in the technology market. The article also does not reflect scenarios for all startups – but it works as a general reading of the market now.
Despite volatility in the capital markets, one of the fastest and most compelling ways to raise funds continues to be through an IPO.
With the uncertainty of market recovery looming over investors and executives, 2022 has already seen a 41% global decrease in IPO volumes and a 57% decrease in IPO values year-over-year.
IPO trends 2022
2021 was record-breaking for IPO, but in 2022 the IPO market experienced a dramatic slowdown. Here are some fuels and outcomes from such a dramatic decline:
- Skyrocketing inflation. The global inflation surge made central banks hike interest rates and tighten monetary policy.
- Increased volatility. Heightened volatility caused by macroeconomic factors, like Russia’s invasion of Ukraine and other geopolitical tensions, decreased IPO activity significantly.
- Lockdowns in China. Dozens of Chinese companies suspended their planned IPOs because of the restrictions and inability to complete due diligence.
- Poor performance of companies that went public in 2021. 80% of IPO stocks from 2021 are trading below their offer prices; the return on offerings from 2021 is minus 30%.
- Fall of the SPAC market. The number of IPOs by Special Purpose Acquisition Companies (SPACs) decreased to the level of 2016 and 2017.
According to Paul Go, the EY global IPO leader, the main IPO trends for YTD 2022 were the following:
- There were 992 IPOs raising $146B in proceeds, reflecting decreases of 44% and 57%, respectively, year-over-year.
- The technology sector continued to lead by number, but the average IPO deal size decreased from $261m to $123m.
- The energy sector was the top IPO fundraiser with an average deal size increase of 176%.
- The consumer products sector saw the most significant decrease in average deal size — 69%.
- The 10 largest IPOs by revenue raised $40B, with energy dominating three of the top four deals.
IPO trends in H1 2022
After a record year in 2021, a sharp decline in IPO H1 activity was noticed worldwide across most major markets in H1 2022.
The Americas market saw the most significant drop in deal numbers — 80% less than the same period in 2021.
SPAC IPOs represented half of the activity. There were 17 deals and $2.2b of proceeds.
The finance sector dominated and took up about 35% of all IPOs. It was followed by the health technology sector, which took approximately 20%.
Asia Pacific region
Almost 50% of all deals in the global IPO market were completed in the Asia-Pacific, making it the most active region.
The most active sectors were biotech, health care, and technology.
The European IPO market was largely closed for most issuers representing 15% of global IPO deals and 4% of proceeds.
Italy saw the most activity in IPO as a chemicals company rose $500M by going public.
The UK experienced a 71% decline in volume and 99% in proceeds, having 13 IPOs that raised $149M.
The Middle East and North Africa (MENA)
Despite the tensions in the global economy, the MENA region saw a 500% year-over-year increase in the number of companies going public.
There were 15 IPOs in Q1 2022 and nine IPOs during Q2 2022 that together raised about $13B.
UAE and Saudi Arabia dominated IPO activity. UAE experienced its largest IPO history with DEWA raising $6.1B.
IPO trends and projections for Q4 2022
Strong headwinds such as declining valuation, skyrocketing inflation, the weak performance of capital markets, and geopolitical tensions will likely prevent companies from going public in the last quarter of 2022.
Consequently, IPO activity is expected to surge by the end of 2023, although some companies are preparing to go public in 2022.
Here are the main projections for Q4 2022:
- Companies waiting to go public must be well prepared when entering the IPO markets as they will encounter much lower valuations than in 2021.
- Mainland China and the Middle East will be more attractive to investors than other regions.
- The green energy sector will lead by value due to revenues generated from bigger deals because skyrocketing oil prices will make people switch to renewable energy faster.
- The technology sector will likely lead by deal number as more technology companies are looking for platforms that can offer consumers a wider range of services.
- ESG will remain a core value for investors and IPO candidates. Companies committing to making the world a better place and incorporating ESG (environmental, social, and corporate governance) values in their culture will attract more investors.
5 largest IPOs in 2022
Money raised: $10.7B
Pricing date: January 14, 2022
Country: South Korea
LG Energy Solution is a South Korean eco-friendly battery company. It created Korea’s first lithium-ion battery in 1999. Later, it became a supplier to global car producers, such as Audi, Volvo, Ford, Chrysler, and Renault.
In the first quarter of 2022, the company had the largest IPO worldwide and raised about $10.7b. Its shares surged 68% on the first day and 40% a month later.
Now LG Energy Solution is worth over $98 billion which makes it the second-largest Korean company after Samsung.
Money raised: $6.1B
Pricing date: April 6, 2022
Country: The United Arab Emirates
DEWA is a public service infrastructure company formed in 1992 by the merger of the Dubai Electricity Company and the Dubai Water Department. Both organizations were founded by Sheikh Rashid who ruled Dubai at that time.
Today DEWA provides electricity and water to almost 1 million customers with a happiness rate of about 95%. It’s also ranked as one of the best utility companies in the world.
After it went public, the company’s shares jumped 16% on the first day and 10% a month later.
Today this is the largest listing in the UAE. Besides, this is the largest listing in the Middle East since the IPO of Saudi Aramco, a Saudi Arabian oil company that raised $25.6B in 2019.
Money raised: $1.6B
Pricing date: January 26, 2022
Jinko Solar is a Chinese solar panel manufacturer based in Shanghai focusing on the research and development of photovoltaic products and clean energy solutions. The company serves more than 3,000 customers and markets its products worldwide in 160 countries.
Jinko Solar was listed on the STAR Board of the Shanghai Stock Exchange in January 2022. It’s the second largest IPO in the first quarter of 2022.
The organization raised $1.6B and showed an excellent after-market performance. It closed 111% above the issue price on the first day of trading and 132% one month later.
Money raised: $2.7B
Pricing date: May 12, 2022
Life Insurance Corporation of India (LIC) is an insurance and investment company. It was founded in 1956 and is owned by the Indian Government. It’s the most trusted insurance company in the country with over 250 million customers.
It went public in May 2022 and raised $2.7B, breaking India’s record as the country’s biggest IPO. It also became the fourth-largest IPO in the world in 2022.
But a record-breaking and oversubscribed IPO raised far less than the government expected. LIC’s shares slid nearly 8% in its market debut. And since May, the shares have plunged 29%. India’s biggest-ever IPO now ranks second in terms of market capitalization loss.
Money raised: $2B
Sector: Basic materials
Pricing date: May 31, 2022
Country: United Arab Emirates
Borouge is a provider of innovative polyolefin solutions and produces plastics for manufacturing and consumer goods. The organization was founded in 1998 and now supplies polyolefin to customers in 50 countries across the Middle East, Asia, and Africa.
In May 2022, the company was listed on the Abu Dhabi Securities Exchange and became Abu Dhabi’s largest IPO, raising $2B.
The shares surged 22% on the first day of trading, valuing Borouge at $24B. It made Borouge the sixth largest company on ADX.
- In 2022, the number of IPOs declined by 44%, and there was a 57% drop in funds raised, contrasting with IPO trends in 2021.
- The main reasons for the decline are COVID-19 restrictions, the Russian invasion of Ukraine, geopolitical uncertainties, economic tension, and rising interest rates.
- The technology sector leads by deal number, and the energy sector leads by deal value.
- The Americas and Europe markets recorded the most considerable decline, while MENA and the Asia Pacific regions were the most active in terms of volume and number of IPOs.
- The five largest IPOs in 2022 were LG, DEWA, Jinko Solar, Life Insurance Corp of India, and Borouge.
Guide on going public
Preparation is prized in the IPO market, and starting early is crucial to success.
To support executives during this stage, the M&A Community, in collaboration with iDeals, published the IPO Consideration Stage white paper, painting the full picture of the key points to consider before deciding to go public while doing so is still under evaluation.
Download the whitepaper here.
One of the most relevant topics in corporate finance is the role of synergies in operations of mergers and acquisitions (M&A’s). Likewise, one of the most relevant themes in antitrust policy is the role of static economic efficiency in concentration acts (CA’s). On the other hand, dynamic economic efficiency forms one of the great drivers of synergies in M&A’s. However, dynamic economic efficiency is usually neglected in CA’s analyses.
The reader may have noticed the fact that, when I refer to the operations of purchase and sale of assets and corporate transactions, I use the term M&A’s; and when I refer to the analysis of concentrations by antitrust authorities, I use the term CA’s. This distinction is intended to highlight a point that normally generates a lot of confusion: an M&A, which is capable to generate great synergies and dynamic efficiency, may not necessarily generate great static economic efficiency.
I suppose the reader may have been confused. In fact, the topic itself is scarcely confusing. We will need to understand better each of these concepts.
One of the most comprehensive books on the topic of synergies in M&A’s is “The Synergy Trap: How Companies Lose the Acquisition Game, by Mark L. Sirower . The author defines synergy as the “addition of the combined companies’ performance over what they would be expected to achieve as independent companies”. (Sirower, 1997 p. 20). Therefore, the author continues, synergy means incremental gains and competitive advantages above what “companies need to survive in their competitive markets”.
The next question to be addressed would be: what are the sources of these synergies?
Many authors believe that synergies originate from the dynamic capabilities arising from M&A’s operations. Therefore, dynamic capabilities would result in dynamic (or Shumpeterian) economic efficiency. “Dynamic capabilities are the antecedent organizational and strategic routines by which managers change the basis of their resources, acquire and create resources, integrate and combine them to generate a new value creation strategy (Eisenhardt & Martin, 2014, p. 214).
The notion of competitiveness gains in the theory of dynamic capabilities results from the company’s innovative potential to generate value from the accumulation and creation of new rare and exceptional resources, combined with already existing resources.
An acquisition can be considered as a purchase of a bundle of resources in highly imperfect markets. By basing the purchase of a rare resource, one can, ceteris paribus, maximize this imperfection as well as the chances of buying that resource at a cheap price and achieving good returns. (Wernerfelt, 2014 p. 57).
Two points should be highlighted about the theory of dynamic capabilities. The first one is that the company does not seek to accumulate strategic resources to increase its market power (market share). In fact, it seeks to “maximize this imperfection”, that is, it seeks to create a new and exclusive market just for itself, that is, to establish a monopoly. In summary, the company is looking for its “Blue Ocean”. The second point is that this approach highlights the strategy of competitive dynamics at the company level, not at the sectoral level, as the strategic approach in the neoclassical economic tradition often tends to be. This tradition provides all the analytical tools of antitrust authorities around the world.
Neoclassical economics works with the notion of static economic efficiency and the analysis of CA’s implies, in most cases, an exercise in cost-benefit analysis. The benefits would correspond to the reduction of operating costs resulting from economies of scale and scope arising from the concentration. On the other hand, costs would be associated with the greater market power of the incumbents, as a result of the reduction in the number of competitors in that market. In this sense, an CA’s would only be eligible for approval if its benefits exceed its costs.
The above paragraphs sought to elucidate the reasons why the issue of efficiency tends to be so controversial and “cacophonic” within the scope of the analysis of CA’s by antitrust authorities. The fact is that companies and authorities do not always speak the same language.
For example, antitrust authorities often ask companies to discuss the economic rationale of their M&A’s transactions and, in some cases, also to provide estimates of (static) economic efficiency. However, companies generally present their justifications in terms of synergies and economic (dynamic) efficiency. Therefore, the authorities tend to (quite often) dismiss the efficiency arguments presented by companies. In practical terms this means that, from a cost-benefit analysis point of view, the expected benefits calculated for the operation are minimal.
It’s clear that not all companies are oriented to engage in M&A’s because of the accumulation of strategic resources and innovation. It’s evident that many companies simply seek to eliminate competitors and increase market power. But wouldn’t an analysis of CA’s efficiency based solely on static economic efficiency be a problem? Wouldn’t it be more appropriate to incorporate the analysis of dynamic economic efficiency in the CA’s analysis “toolbox”?
This was exactly the point made in the article entitled “Dynamic Competition in Antitrust Law”, by J. Gregory Sidak and David J. Teece, published in the Journal of Competition Law & Economics, 2009. The authors sought, with the publication of this article, to instigate the discussion that would guide the revision of the Horizontal Merger Guidelines of the DOJ and FTC, which took place the following year, in August 2010.
In fact, the authors managed to instigate discussion and debate, mainly due to the opposition of economists and jurists linked to the antitrust tradition of the Chicago School. Sidak and Teece’s proposal did not succeed in the review of the US guide in 2010. It did not find repercussion in other jurisdictions either.
It is not possible to make an inference as to how much progress or setback we would get by introducing dynamic economic efficiency analysis into the antitrust economic analysis toolkit. The only completely clear point is that the discussion of economic efficiency analysis remains one of the most controversial and obscure topics in CA’s analysis.
Accordingly, Wernerfelt (2014) defines an acquisition in the following terms:
1 This article was originally published in Portuguese by WebAdvocacy.
2 SIROWER, M. (1997). The synergy trap: how companies lose the acquisition game. The Free Press: New York, NY.
3 EISENHARDT, K.M. & MARTIN, J.A. (2014). What are dynamic capabilities. In: LACERDA, D.P.; TEIXEIRA, R.; ANTUNES, J.; NETO, S.L.H. (org.). Resource Based Strategy. Porto Alegre: Bookman, 2014.
4 WERNERFELT, B. (2014). The resource-based view of the enterprise. In: LACERDA, D.P.; TEIXEIRA, R.; ANTUNES, J.; NETO, S.L.H. (org.). Resource Based Strategy. Porto Alegre: Bookman, 2014.
5 KIM, W.C. & MAUBORGNE, R. (2019). Blue ocean strategy: How to create new markets and make competition irrelevant. Sextant Publisher: Rio de Janeiro, RJ.
6 SIDAK, J.G. & TEECE, D.J. (2009). Dynamic Competition in Antitrust Law. Journal of Competition Law & Economics. Vol. 5(4): p. 581-631.