M&A in the tech sector: outlook for 2014




FW moderates a discussion on M&A in the tech sector between Susan Blanco, a managing director at Houlihan Lokey, Nick Abrahams, a partner at Norton Rose Fulbright Australia, and James Klein, a corporate partner at Penningtons Manches LLP.

FW: Could you provide a brief overview of the current M&A landscape in the technology sector? What trends and developments have you seen in the last 12-18 months?

Blanco: Even compared to the recent strong M&A landscape, the technology market has shown tremendous performance over recent years. Overall, the M&A market increased 4.1 percent in total transaction size from 2012 to 2013, during the same period, the technology M&A subsector saw transaction size increase 30.5 percent. A similar trend appears to be emerging in 2014 with total transaction size in global M&A in Q1 2014 increasing 12.3 percent over Q4 2013 and technology M&A in Q1 2014 increasing 15.3 percent over Q4 2013. In terms of total number of transactions, technology transactions increased 18 percent in Q1 2014 over Q4 2013, while global M&A transactions dropped 8.1 percent in Q1 2014 from Q4 2013. With an 80 percent, 60 percent and 25 percent year-over-year increase in Q3 2013, Q4 2013, and Q1 2014, respectively, M&A activity in the technology sector appears to be not only steady, but active.

Abrahams: The M&A landscape in Australia had slowed down post-GFC, however in the last 12-18 months we have seen a significant pickup in technology and telecom transactions. Many of these transactions are being driven by overseas investments coming into Australia.

Klein: In 2013 TMT deals overtook the energy, mining and utilities sector for the first time since 2006 and accounted for 23 percent of global M&A activity in 2013, up from 14.5 percent last year. Cloud continues as a trend and M&A activity continues to be driven by demand for reliable and secure mobile infrastructure. Cloud has changed the face of technology investments, providing new services for subscription and new opportunities to monetise information and services. More generally, M&A is being used to enable companies to move into new areas such as Microsoft’s acquisition of Nokia’s handset business or to consolidate and strengthen existing offerings. Larger technology corporates – particularly in the US – continue to see the appeal of corporate venturing in this high growth sector, with many looking to set up a venture capital fund or offer strategic alliances.

FW: What factors are driving today’s tech deals? In terms of segments or regions, are you seeing any particular hotspots for M&A?

Abrahams: There has been strong growth in US investments in Australia, especially in the form of venture capital. In recent years a number of large US companies have lost significant investments as a result of investing into Asia directly. Australia is seen as a safe investment and a proxy for the growth in nearby Asian markets. It is seen as an innovative market for IT and in recent years we have seen a large number of Australian start-up companies taking centre stage such as Atlassian and Big Commerce. There has also been good growth in Australian cloud companies, which are able to build a business with a global customer base, for example Connect2Field.

Klein: Mobile devices, cloud offerings, data analytics, and industry-specific applications – including payment processing solutions – and services remain key areas for IT investment, continuing the trend of recent years. Software remains prominent for deal activity in 2014. Technology companies of all shapes and sizes are focusing on driving more industry-specific solutions across industries such as healthcare, retail, banking, and industrial products. In turn, these industry-specific acquisitions are accelerating growth and driving M&A activity. Renewed economic confidence is feeding into M&A tech deals, with companies keen to make the most of built up cash reserves and improved consumer confidence with the US remaining a key deal destination.

Blanco: Several factors are driving today’s tech deals; however, general availability of capital and competition within the sector are the two most prominent drivers. The current availability of capital has created a favourable acquisition environment as private equity funds are sitting on record amounts of dry powder, strategic acquirers have substantial cash reserves and interest rates remain low. Intense competition among technology firms is also driving acquisitions as companies look to expand into new verticals to grow and retain relevance. Within software subsectors, we are seeing a lot of activity in HCIT, HCM, and CEM. HCIT activity is driven by regulation and digitalisation, HCM is driven by demand to provide a full suite of solutions and CEM activity is centred around emerging companies gaining scale and market research firms making technology acquisitions. We are also seeing a lot of movement in the wearables sector, which is bridging hardware and software, as well as health and wellness, sports and fitness.

Even compared to the recent strong M&A landscape, the technology market has shown tremendous performance over recent years.
— Susan Blanco

FW: What major deals have you seen in recent months? To what extent are these deals shaping the market or signalling future industry trends?

Klein: The $19bn acquisition of WhatsApp by Facebook at the beginning of this year signalled that 2014 would be a big year for technology mergers and acquisitions. The rumoured purchase of satellite TV company DirecTV by AT&T Inc – which is potentially worth $40bn – shows the scale of some of the deals anticipated. It also demonstrates how the TV sector is in a state of flux following the announcement by Comcast in February of its $45.2bn deal to purchase Time Warner Cable. Deals such as Lenovo buying Motorola’s handset business have shown that companies are looking to harvest some of their business units to compete in areas like cloud. These deals show that larger technology businesses are looking to take advantage of a receptive market by divesting some of their non-core operations. As shares gain in value, confidence – and the means – to acquire new companies grows.

Blanco: In recent months, we have seen multiple major deals close in the technology sector at record multiples. To cite a few – Vantiv announced the purchase of Mercury Payment Systems at 7.0x revenue, and Oracle acquired Responsys at 8.2x revenue and Acme Packet at 6.1x revenue. These recent transactions have demonstrated that the market is rewarding growth and recurring revenue businesses. In general, valuations for these technology companies have been above historical averages. Specifically, best-in-class SaaS companies have been commanding large premiums and trading at strong multiples. Going forward, a slight pullback in technology company valuations may occur as investors look to make exits, however the intense competition amongst large-cap technology companies combined with the amount of capital waiting to be invested should support valuations for the near future.

Abrahams: The global phenomenon of buying online companies has continued and its effects are being felt in Australia. We also have recently seen the growth of US venture capital into Australia – recently I advised Technology Crossover Ventures, a large US venture capital fund consisting of some of the original investors in Netflix, on their investment into the Australian company Siteminder, an online hotel booking site. The Australian IPO market is open for tech companies, for example OzForex, iSelect and Freelancer. In addition, backdoor stock exchange listing of technology companies has become common in Australia, for example Bulletproof Networks.

FW: Are there any unique issues that acquirers need to consider when negotiating and structuring a tech sector deal? Are any particular areas often overlooked or underestimated?

Blanco: When negotiating and structuring a tech sector deal, it is imperative for acquirers to understand the value of recurring revenues and the lower-risk financial profile associated with recurring revenue and SaaS companies. The immediate scalability and cross or upsell potential, de-risk product line acquisitions when compared with other sectors with longer supply chains. In tech transactions, we often see the tendency for acquirers to overlook the integration between sales forces. Since tech deals are usually driven by revenue synergies as opposed to cost savings, this is a valuable area for prospective acquirers to evaluate when contemplating a transaction.

Abrahams: All too often those seeking to purchase technology companies will be focused only on the one particular core piece of technology that makes a target worth investing in. Often, investors lose sight of the IP rights involved in securing that technology and associated technology. Further, securing the individuals involved in maintaining and developing that technology is an issue that is often overlooked. Unless you have the expertise to maintain a technology on your own employment issues are critical. Acquirers need to be aware that Australia’s unusual employee share option plan rules mean specific planning needs to be done in advance in order to enable ESOP. US purchasers often check for open source code due to fears of patent trolls. Non-competes given by founders or executives are important as a result of many Australian technology founders or executives having shareholdings in other tech companies.

Klein: Areas that are overlooked include the strength of the intellectual property underpinning the technology in the target and, in turn, the measures necessary to protect that intellectual property. Another overlooked area is the competitive position of the target in its chosen market(s), particularly where those chosen markets include the US and Europe, and any threats posed by incumbent providers in that market. This is especially important in the case of disruptive technologies. The business model and ability of the management team to implement the deal may be just as, if not more, important than revenue streams. Similarly, the importance of identifying and retaining key strategic personnel in the business and the ‘search for talent’ should not be overlooked. One of the key reasons that companies make acquisitions and merge with others is the need to build their own talent and invigorate their businesses with an influx of new talent.

All too often those seeking to purchase technology companies will be focused only on the one particular core piece of technology that makes a target worth investing in.
— Nick Abrahams

FW: Managing risk and identifying value are fundamental parts of the M&A process. In your experience, does due diligence in tech M&A need to go beyond the scope of deals in other sectors?

Abrahams: Due diligence in technology-related M&A deals often touches on similar issues to due diligence in other sectors but is specialised in certain respects. When purchasing a company that specialises in a particular piece of technology it is important to fully understand that technology, what third party products may be used, what IP rights are involved and what the opportunities for growth may be. Due diligence in technology related companies will also often involve multiple jurisdictions.

Klein: Tech companies are technologically advanced, often more so than companies in other sectors. As such, issues that are particularly relevant to tech M&A deals include ensuring that acquirers have a thorough understanding of all cyber security incidents and records of all IT security assessments, improvements and best practice governance; establishing to what extent Software as a Service (SaaS) or cloud computing is relied upon and the associated facts such as the jurisdiction(s) from which the services are provided; history of breach or failures, and so on; and establishing the extent of the intellectual property owned by the company and how much of this is registered or unregistered. In addition, firms must adequately check for compliance with data protection and privacy laws. This is especially important given the penalties that can be levied for confidentiality breaches or breaches of data protection legislation and reputational damage that can be caused by these breaches.

FW: Could you explain the importance of analysing a target company’s IP assets in a tech transaction? What are some of the key steps in this process?

Klein: In a tech transaction, a target’s IP will often be the driver for the deal. For example, an acquirer’s post-deal strategy may be to commercialise the target’s patent portfolio. Therefore, analysis of IP assets is fundamental as the acquirer will need to analyse not just the target’s legal rights in the patents but also carry out technical analysis of inventions covered by the patent claims. Typical steps in analysis of IP assets are to identify registered rights, such as trademarks, patents and designs, and unregistered rights, such as rights in software, database rights and unregistered trademarks. Identification of unregistered rights can be more complex. For example, for software, the buyer needs to establish the chain of creation to ensure ownership is properly vested in the target. Contracts with employees and any contractors involved in IP creation should be checked. The buyer should also check the nature of usage of open source software to assess if this may have any inadvertent impact on future usage of the target’s proprietary software.

Abrahams: Protecting a target company’s IP assets in a tech transaction is extremely important. One only has to look at the billions of dollars awarded in various IP disputes between Apple and Samsung to see the potential damage IP issues can play in tech transactions. Technology transactions tend to involve a program or an idea that makes a company worth purchasing. Often the target company will not have properly registered or protected their IP assets, or may have used third party IP assets. Some of the key steps to be aware of when looking at IP in a technology transaction are identifying the IP assets that are important to the asset and client – this involves more than simply checking the registries; how can we protect these IP assets if they are not already protected?; and how can we defend our right to use the IP assets if a claim ever comes up?

Analysis of IP assets is fundamental as the acquirer will need to analyse not just the target’s legal rights in the patents but also carry out technical analysis of inventions covered by the patent claims.
— James Klein

FW: What are the prospects for M&A activity in the tech sector throughout the remainder of 2014? In your opinion, what trends and developments will shape the market?

Blanco: The outlook for the remainder of 2014 continues to looks strong as excessive capital and fierce competition governs the sector. With the volume of private equity dry powder at record highs, billions of dollars sitting on public company balance sheets, and low interest rates driving investment elsewhere, M&A activity will continue to be strong. Technology consolidation will continue to be robust as intense competition drives the sector. Strategic buyers will continue to make acquisitions to diversify product suites, using cash or their highly valued stock to make acquisitions. Despite seemingly expensive valuations, all signals point to continued robust M&A activity in the technology sector for the balance of 2014 and the foreseeable future.

Abrahams: Prospects for technology M&A in Australia are very good. As more US venture capital is invested in Australia, more overseas companies will consider investing in the Australian market. Cloud computing will continue to open opportunities for Australia to develop global businesses.

Klein: The prospects for M&A activity in the remainder of 2014 are the most favourable they have been for some time. The growing availability of Internet access worldwide and the proliferation of mobile devices and social media networks have led to an increasingly connected consumer base. This provides new market opportunities with technology companies responding to consumer and market needs — often through M&A in areas such as services, mobility and big data. Trends like the ‘Internet of Things’ will affect deals as well, with companies looking to take advantage of web-connected devices across homes and workplaces. We have already seen companies including Cisco Systems Inc., AT&T Inc., ARM Holdings Plc, General Electric Co. and Intel Corp. aiming to monopolise on this trend by providing software, hardware, components or connectivity to a variety of wireless, connected gadgets. Continued security concerns and breaches have highlighted the need to ensure that information is secure. This will continue to be of increasing importance as cloud and mobile technologies continue to grow. As a result, technology companies will look to acquire new security capabilities.


Susan Blanco is a managing director in Houlihan Lokey’s Technology Group. She has spent her entire career focused on technology and technology investment banking. Ms Blanco is based in the firm’s San Francisco office. Before joining Houlihan Lokey, Ms Blanco was a co-founder of ArchPoint Partners, LLC, a boutique investment bank focused on providing mergers and acquisitions and capital raising advisory services to technology companies. She has completed numerous transactions for public and private companies in the technology sector. Ms Blanco can be contacted by email: sblanco@hl.com.

Nick Abrahams is a corporate and commercial lawyer at Norton Rose Fulbright Australia. He is the leader of the firm’s Asia Pacific Communications, Media & Technology Group. Mr Abrahams is widely recognised for his breadth of knowledge and understanding of all aspects of technology, media and telecommunications. In addition to mergers and acquisitions work in the sector, he regularly advises on cloud computing, outsourcing, IT/IP issues, internet and telecommunications matters, media regulation, content and privacy. Mr Fulbright can be contacted on +61 2 9330 8312 or by email: nick.abrahams@nortonrosefulbright.com.

James Klein is a corporate partner in the London office of Penningtons Manches LLP and a member of the technology sector group steering committee. He advises on a wide spectrum of transactions including domestic and cross-border M&A, corporate restructurings and reorganisations and joint ventures. Mr Klein has a strong track record advising on private equity transactions having acted for many management teams and private equity/venture capital houses on numerous mid-market deals. Mr Klein can be contacted on +44 (0)20 7457 3207 or by email: james.klein@penningtons.co.uk.

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Susan Blanco

Houlihan Lokey


Nick Abrahams

Norton Rose Fulbright Australia 


James Klein

Penningtons Manches LLP

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