So far this year, deal parties are approaching M&A with cautious optimism. Over the next few days, we will run a series of Cooley M&A blog posts with some brief observations that offer some M&A highlights over the past year and our thoughts for the year to come.

Cautious Optimism in the New Year

The overall number of M&A deals in 2016 increased by 1% compared to the year before (Thomson Reuters), but this fact did not grab headlines because the dollar value of M&A deals fell by 16%, mostly due to a significant drop in blockbuster deals. We expect this trend to continue, with mid-market and smaller deals driving the deal count in 2017. Dealmakers appear much more optimistic in the first quarter of 2017 than at this same time last year, in part because of greater optimism about the IPO market and the potential for favorable corporate tax and other regulatory changes.

Tech was the second busiest M&A industry in 2016 behind energy. We expect tech M&A will remain strong in 2017 as big industry verticals become more competitive and companies of all sectors increasingly focus on areas such as analytics and cybersecurity.

Private equity funds are increasing their investment allocations in the tech space, and PE buyers who have traditionally not invested in the tech space because of relatively high valuations, operational dependence on key personnel and fewer opportunities for value investments, among other reasons, have shown an increasing appetite for tech investments. We are seeing funds increasingly fundraising for tech plays and are acquiring the needed sector expertise to build their tech portfolios.

We also expect mature, VC-backed companies to continue searching for exit opportunities and may see more “quasi” distressed sales in the first half of the year as their impatience for an IPO market more open to smaller issuers reaches a fever pitch. After some highly anticipated IPOs in the first half of 2017, we expect the reopening of capital markets in the latter half of the year to provide more stabilized valuations for companies, which should lead to more normalcy in M&A and strategic combinations.

Life sciences exits were way down in 2016, as many acquirers stood on the sidelines awaiting the outcome (and now, effect) of the US presidential election. The continued publicity and political focus on drug pricing has created uncertainty in valuing specialty pharmaceutical and biotech companies. While pharmaceutical and specialty pharmaceutical companies will continue to build product pipelines through acquisitions, the pace of activity may continue to be uneven given the uncertain regulatory environment and valuation gaps, which could impact potential exits for private, venture-backed targets.