Mergers and acquisitions have boomed over the course of the last 18 months. From mega-mergers to the mid-market and smaller scale transactions, the resurgence has been considerable. For the first time, M&A activity, particularly in the US, has reached pre-crisis levels. Though there remain a number of issues surrounding the global economy, dealmakers in the US have been spurred into action by historic low interest rates, record stock prices, improving employment numbers and an abundance of available financing.
Acquiring companies in the technology sector have been particularly active. M&A boomed in the first quarter of 2015. According to data from EY’s ‘Global technology M&A update: January-March 2015’, tech sector M&A has continued to set new post-dotcom-bubble highs for both quarterly value and volume. Overall, there were 981 technology deals in the first quarter of the year with an aggregate value of $77.1bn – a figure which represents the highest value of any quarter since Q1 2000. According to James Klein, a partner at Penningtons Manches, 2015 is shaping up to be a momentous year for tech M&A. “Continued economic and consumer confidence is feeding into M&A tech deals, with companies keen to put to work large built up cash reserves,” he says.
Corporate buyers contributed to 15 deals above the $1bn mark in Q1, according to EY’s data. The quarter also saw considerable cross-border activity. Cross-border technology deals had an aggregate value of $32.2bn. More than seven cross-border transactions were valued at over $1bn, with another valued at more than $10bn. Chinese tech M&A heated up considerably. And while the US and Europe were overall net sellers, Japan and Canada were net buyers.
The impressive levels of action recorded in the first quarter of 2015 were built on the resurgence of tech sector M&A in 2014. According to data from Dealogic, 2014 experienced a bumper year of activity, with around $184bn worth of M&A transactions involving US technology companies alone.
As more players in the M&A market look set to acquire companies as 2015 progresses, the appetite for deals is strong. Indeed, the M&A market is set for continued growth into 2016. EY’s Global Capital Confidence Barometer notes that 56 percent of global companies intend to acquire businesses over the course of the next 12 months. As the wider M&A market heats up, so too will activity in the tech space.
One of the main narratives in the corporate world in 2014 revolved around the tech sector. From a flurry of IPOs to surprisingly high valuations for dotcom businesses, many analysts within the space in 2014 began to talk of a bubble forming around IT and the wider tech sector. The IPO of Chinese internet firm Alibaba Group, which is incorporated in Cayman Islands and listed on the New York Stock Exchange, raised an impressive $21.8bn in September. According to Nick Abrahams, a partner at Norton Rose Fulbright, there were around 40 tech IPOs and reverse takeovers completed on the Australian Securities Exchange (ASX) in 2014, up from only five deals completed in 2013.
For 2015, the technology sector will be one of the main drivers of the resurgence in global M&A activity. The increasing importance of mobile technology, the emergence of cloud computing and companies’ ever-increasing reliance on data analytics will motivate confident firms to dip into the deal market.
Verizon Communications Inc’s $4.4bn acquisition of AOL Inc is a testament to the continued appetite for tech sector M&A among the bigger players in the space. According to AOL chief executive Tim Armstrong, the joining of Verizon and AOL will “create what I think is the largest mobile and video business in the United States”. The company believes that by partnering with Verizon, the newly merged company will have the strength and financial power to compete with some of the more illustrious tech companies, such as Google and Facebook. Mr Armstrong believes that the newly merged company will have a “real seat at the table for the future of media and technology”.
However, activity in the tech space will not be restricted to the industry’s heavyweights. Many deals witnessed in the first half of the year can be attributed to newer entrants to the sector. Social media companies have made a big impact in recent years, and will likely continue to do so.
Transactions such as Facebook Inc’s $21bn acquisition of messaging application WhatsApp in 2014 will continue to play a significant role in the future of tech M&A. Though many of the deals may not reach the size of this deal, more social media transactions are expected throughout the second half of 2015. Twitter has been particularly active, acquiring a number of smaller, more specialised companies, including Niche for around $30m and Periscope for around $86m, in the first half of the year. As competition in the social media industry intensifies, as it has done in the wider tech sector, companies will look to boost user engagement by making bolt-on or complimentary acquisitions. Twitter’s transactions in the first two quarters of 2015 have been made with this in mind, designed to not only increase the firm’s user base but also its revenue.
In recent years, Silicon Valley and the region’s biggest hitters, Google, Apple, Facebook and others, have become a major narrative in the world of M&A. For example, today the region accounts for one-third of all venture capital (VC) investments in the US and an increasing number of cross-border M&A transactions. The increase in VC funding is of particular importance for start-up companies in the tech space, with VC funding so abundant in the tech sector there is less pressure initially upon start-ups to bring products to market. Given that many start-ups have no real roadmap to profitability, acquisition by a major industry player offers a simple and elegant solution.
The US is no stranger to industry consolidation; the tech sector, much like the wider media and entertainment industries, has also seen its fair share in recent years. However, the wave of consolidation could gather pace in the second half of 2015. Twitter and professional social media firm LinkedIn have both missed earnings forecasts, which sent share prices spiralling in H1 2015. While both firms have looked to offset market fears by acquiring smaller companies of their own, it is entirely possible that some of the tech sector’s largest players could launch an audacious takeover attempt. The splitting off of eBay and PayPal may also bring some of the tech space’s biggest hitters to market, with the two smaller companies offering attractive potential targets for firms looking for a competitive edge over their rivals. “The US remains a key destination,” suggests Mr Klein. “Dealmaking in the US in 2015 has climbed 48 percent year-on-year to $565.6bn, the highest level since 2007, following a string of multi-billion dollar acquisitions.”
Other burgeoning segments of the technology space will also help to further M&A activity. In addition to cloud computing, the increasing availability and popularity of wearables and eventually the so-called ‘internet of things’ will drive M&A transactions.
The ongoing issue of cyber crime and cyber security will encourage firms to enter the market. Though there has been some concern that the recent uptick in cyber crime could have a detrimental effect on M&A activity, the opposite may well be true. A number of notable companies including Sony, JP Morgan Chase and Target have all been victims of cyber crime, but this is unlikely to deter firms from seeking acquisitions. With more cyber security breaches than ever before, and cyber crime dominating headlines over the last 18 months, cyber security is likely near the top of many corporate agendas. As firms look to bolster their cyber security offerings, developing companies are becoming significant targets; in 2014, large security vendors acquired companies with capabilities outside of their core business and looked to expand the scale of products they offered. This is likely to continue throughout 2015 into 2016 as high tech start-ups become more attractive to firms looking to strengthen their product lines.
Intellectual property (IP) is also likely to be a key consideration for acquiring companies operating in the tech space. IP is a pivotal feature as firms look to differentiate themselves from the competition and place a greater value on a target company’s IP. According to Mr Klein, IP will continue to motivate acquiring companies going forward. “From a strategic perspective, the primary motivators for technology deals are access to intellectual property and talent, bolt-on acquisitions to enhance new products, the acquisition of innovative technologies or products, the desire to enter into markets, and the desire to expand existing technology platforms,” he says.
Indeed, IP is increasingly viewed as a pivotal corporate asset helping to drive M&A activity. Buyers need to conduct thorough analysis of their target’s IP assets before completing a transaction. Tech sector M&A is likely to continue to flourish in the coming months, particularly given the establishment of the Unified Patent Court in Europe, which will make it easier for patent-rich companies to enforce their rights, thereby increasing the value of their assets. The rising importance of IP rights in the tech sector will set the agenda for many deals going forward.
The tech sector is clearly in a state of flux; as traditional and established firms in the tech space grow accustomed to rubbing shoulders with disruptive newcomers and start-ups, the need to differentiate is becoming more important.
Accordingly, firms are looking to M&A deals as a panacea to their problems. Globally, deals in the tech space are being driven by a number of desires. Greater access to valuable IP, talent procurement, product enhancement, disruption and expansion are just some of the primary motivators for the resurgence of tech M&A. With interest rates at near historical lows, companies are exploiting the situation and borrowing money to finance takeovers, which a few years ago they might not have pursued.
To date, 2015 has been the year of tech sector M&A. 2016 might just be too. That said, companies must move quickly; as Mr Abrahams notes: “The positive sentiment on tech will not last forever.”
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