In late February Facebook Inc announced it had agreed to acquire mobile messaging app WhatsApp in a deal worth around $19.5bn. The deal for WhatsApp represents Facebook’s largest ever acquisition and could herald the beginning of an M&A boom in the technology sector.
Facebook’s acquisition dwarfs the company’s previous biggest purchase, the $1bn deal the company struck for Instagram in 2013. Furthermore, the WhatsApp acquisition is the fifth-largest technology deal of all time. The deal also serves to push globally announced M&A activity in the technology sector in 2014 up to $42.4bn at the time of writing. This figure marks a significant upswing year on year, rising 39 percent compared with the same period in 2013, as well as marking the highest level of activity in the tech sector since the dotcom boom when $79.6bn was raised in 2000.
The first quarter of 2014 has seen a number of significant M&A deals announced in the technology sector and it is likely such deals will increase throughout the year. During January and February, Dutch business Ziggo was acquired for around $13.7bn by Liberty Global and the acquisition of Sirius XM Radio by Liberty Media for around $10bn was also announced. The aggregate value of global technology M&A was driven up by 65 percent to a post dotcom bubble record of $188.2bn. By the end of 2013, quarterly volume in the technology sector averaged 711 deals; seemingly, the momentum from the explosion of tech deals in 2013 has carried over into the new year.
After providing the catalyst for numerous protracted legal disputes, significant stores of intellectual property and patents are expected to be the main drivers behind the next wave of M&A in the technology sector. As many of the bigger players have continued to jostle for position, IP and patents have assumed a greater levels of importance. Indeed, the propagation of patent disputes in the incredibly lucrative smartphone sector in recent years is a testament to the value of intellectual property and patents.
According to professional services firm EY, five ‘megatrends’ will help to drive M&A in the technology sector in the months and years ahead. Deals involving mobile, social, cloud, big data analytics and accelerated technology adaptation have all helped to drive transactions in the recent past, a trend that is expected to continue.
Understandably, revenue and profitability are also likely to play a major role in future transactions in the tech sector. When considered in this context, Facebook’s acquisition of WhatsApp seems overpriced; on the surface the social network has paid an extravagantly high amount for a company with estimated 2013 revenue of just $20m. The company charges users just 99 cents per year for the service, the first 12 months of which are free. However, Facebook is hoping that WhatsApp, which will operate independently and remain devoid of adverts, will prove to be a lucrative investment in the long term. WhatsApp currently has a user base of around 450 million, many of whom are users younger than those who use Facebook, with over 70 percent logging into the service on a daily basis. Accordingly, the addition of WhatsApp to Facebook’s growing portfolio of companies could help the company generate more growth and revenue from younger users that are apparently turning away from the social network in large numbers.
While WhatsApp is popular with younger users, it is also incredibly popular outside of the US. WhatsApp draws the majority of its users from Europe, Latin America and Asia. Facebook’s founder and chief executive Mark Zuckerberg has stated that his company hopes to tap into the next billion internet users, particularly in emerging and underdeveloped nations. The acquisition of WhatsApp will help Facebook meet those targets.
Away from additional revenue, software may also have a large role to play in the future health of M&A in the technology sector. Many analysts have argued that software will remain at the forefront of tech deals in the future. Cloud computing is expected to blur the line between traditional software and other internet sectors.
Recently, Facebook’s chief rival Google Inc carried out its own tech sector M&A spree. Google has invested heavily, spending $3.2bn on Nest Labs, $400m on artificial intelligence developer DeepMind Technologies and $1bn for Israeli mapping developer Waze Mobile. Including a number of investments in the robotics sector, which saw Google acquire Boston Dynamics and seven other smaller firms, Google has completed 127 acquisitions, investments and sell offs over the course of the past three years. Google is on track to becoming a genuine M&A powerhouse in the technology sector.
M&A in the technology sector has been on the increase for some time, and consolidation within the sector has continued at pace. It looks unlikely this process will slow down anytime soon.
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