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TalkingPoint: M&A In The Tech Sector « Back
July 2012
FW moderates an online discussion on M&A in the tech sector between Nat Burgess at Corum Group, David R. Yates at Hunton & Williams LLP, and James Klein at Penningtons Solicitors LLP.

FW: What are some of the major trends you have witnessed in technology M&A over the last year or so? Have any particular deals caught your eye?

Klein: Global technology M&A volume in 2011 increased by around 11 percent. Private equity deal volume growth was strong throughout 2011; the aggregate value of PE backed deals in 2011 grew at nearly twice the rate of corporate deals, with investors being attracted by strong balance sheets and higher growth rates. Since the last quarter of 2011 deal volume in the sector has declined, with the value of disclosed deals falling significantly. During 2011 deal volume increased across the sector except for general software, with the same trend continuing into the first quarter of 2012, although software still has the highest deal volume of any sector. Within software, video technology (especially mobile) and Software-as-a-service (SaaS) deals increased and continued to do so. Social media, e-commerce, information management, cloud computing and IT security also flourished. In the Americas, PE investors were particularly focused on cloud computing/SaaS and healthcare technologies. The second half of 2011 featured a number of substantial deals, such as Hewlett-Packard’s purchase of Autonomy Corp PLC for $10bn, Microsoft’s acquisition of Skype and Google’s all-cash buyout of Motorola for $12.5bn. Google’s acquisition of Motorola is evidence of the trend of using M&A to gain control of valuable patents. Indeed, Google completed no less than 21 acquisitions in 2011, in addition to the 27 companies it acquired in 2010. The UK technology sector saw a number of overseas buyers in 2011 – in particular large US technology corporates on the UK acquisition trail like IBM, Google, Cisco, Amazon and Twitter – as well as a number of delistings. The balance sheet of the technology sector remains solid. The top 10 global technology companies have around $300bn in cash and are well positioned to fund M&A activity without the need to call on bank funding.

Burgess: Valuations are up, buyers are hiring corporate development personnel and actively seeking deals, and private equity buyers are more willing to ‘lean forward’ and credit aggressive EBITDA forecasts toward current valuations. 2012 is reminiscent of 2006, the last big run-up to a tech M&A peak.

Yates: We have seen more and more deals and activity in a number of technology sectors that are becoming further defined, including cloud computing, smart mobility (and particularly mobile payment systems) and ‘big data’ analytics. Cloud computing, as it has hit the mainstream and is accepted by an increasing number of large and small business and home users, presents unique opportunities for large strategics to round-out or expand their service offerings – many of which were completed in 2011 and now have the foundation in place – and for financials to pursue industry-specific middle market tech players to expand into cloud services in that industry. Meanwhile, the ‘big data’ analytics sector has seen tremendous activity as better value is being derived by the end-user from the output. So far this year, Dell’s acquisition of AppAssure Software is particularly interesting since it is Dell’s first software acquisition since it announced its new software group in February. The move highlights Dell’s desire to move quickly on the software side with a focus on system management and cloud services.

FW: What are the drivers of activity in today’s market? Are there any segments or regions that seem to be offering a wealth of M&A opportunities?

Burgess: The premium tech M&A deals over the past 12 months have been driven by cross-border dynamics, diversification, and the explosive growth of certain key markets. US companies have billions in cash overseas, where they can put it to work on M&A, rather than repatriating it and facing stiff taxes. All of the major buyers we talk to, from Microsoft on down, are refining their strategies for buying quality companies offshore. In the last four months we have sold a French company to ANSYS, a Korean company to Intel, and have received other offers and indications from US companies looking to put offshore capital to work. Diversification is also a strong driver. Big tech companies are seeking the growth that they can’t achieve in their legacy markets. They are placing bets in new areas. The segments that are drawing the most attention are cloud and data centre, mobile, collaboration, and customer engagement.

Yates: Financing and economic considerations are driving much of the activity in the tech sector. The biggest drivers are the low cost of borrowing, cash on hand by top technology companies, available capital of private equity funds and anticipated tax increases in 2013 for income and capital gains/dividends in the US. Interest rates have never been lower, and we have seen the return of ‘near’ covenant-lite loans for the right deals. However, lenders are requiring more equity which has not been an issue for strategic or financial buyers. As for the coffers of the top 20 US technology companies, they are filled with over $300bn of cash and marketable investments, according to PwC’s March 2012 report. Similarly, private equity is sitting on billions of dollars of dry powder yearning to be invested. Finally, US sellers have an undeniable incentive to sell before 2013 to take advantage of lower capital gains/dividends tax rates before the 2013 increase go into effect. In order to achieve this, many of those deals are likely in process already. Even before the US Supreme Court’s decision to uphold the Affordable Care Act, the healthcare industry was a key focus in the tech sector. The implications of the Affordable Care Act on the tech sector are undeniable, and will channel more focus and activity on the tech sector to serve and solve issues in the healthcare industry presented by the Affordable Care Act.
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