U.S. Tech M&A Could Swell in 2012

Students of U.S. mergers and acquisitions are hopeful that there will be an upturn in 2012, after the relatively flat year that is just now ending. But one of the groups analyzing deal prospects — Ernst & Young LLP’s Transaction Advisory Services — is forecasting a particularly strong year ahead for technology M&A.

The tech sector, like all of M&A, is just completing a relatively quiet 2011 in terms of deal numbers. E&Y notes a slight decrease in both the number of domestic deals — 1,325 of them as of Nov. 30 — and value, with total U.S. volume slipping to $79.4 billion. (Globally, there was a mere 5% uptick in tech M&A numbers, although a sharper 18% climb in deal value occurred, to $152.4 billion.)

But with swelling demand in the digital consumer field, E&Y anticipates that strategic deals will be sought by U.S. companies wanting to integrate mobile, wireless and cloud technologies, and to create new business frameworks. Two other factors behind the expected moves: a desire to gain from the current low valuations, and from an a liquid market for patents held by tech companies.

‘Transformative Cycle’

“We are entering a transformative cycle for technology propelled by mobility, the evolution of cloud computing and the explosion of data,” according to Jeff Liu, E&Y Capital Advisors’ U.S. group head for technology M&A and capital and debt advisory. Despite the flat current year, he says, “2012 will be a strong year for technology M&A as these disruptive technologies spur significant strategic deal-making activity among technology companies and PE firms looking to generate returns.”

That could make technology deals stand out, even in the strong overall year E&Y is forecasting.

“There are a number of transactions in 2011 indicative of trends that we expect to continue to see next year,” Liu says in a response to CFOworld’s questions seeking examples. “The acquisition of Success Factors by SAP illustrates the strategic importance of pure software-as-a-service targets to large traditional software vendors; and demonstrates how large — and competitively threatening — some SaaS players have become.”

He adds, “We expect private equity funds, with their deep pockets, to be active in the technology M&A market, and to look at non-traditional LBO opportunities. Notably, we’re seeing sponsors participate in more growth-oriented transactions like the acquisition of Go Daddy by KKR, Silver Lake and TCV. Finally, after a year where the IPO market has been relatively quiet, the recent deals by Groupon and LinkedIn, and the anticipated deals by Zynga and Facebook, may re-open the offering window, giving some private companies the opportunity to go public as an alternative exit.”

Liu notes, though, that “it appears that only large, well-branded companies are tapping the IPO window now, so some deals in registration may need to look to M&A alternatives.”

Strong fundamentals will continue to prevail in the broader M&A market as a lackluster 2011 for U.S. deal numbers draws to a close. There were 7,073 U.S. deals overall as of Nov. 30, just a few more than last year at this time. The 18% rise in deal valuation — the same percentage as for tech M&A — has still brought overall volume for the year to $894 billion.

And those strong fundamentals are still in effect, according to E&Y, led by extremely strong cash positions, with the Fortune 1000 companies holding $2 trillion in cash on their balance sheets. Further, credit markets continue to improve. And a recent E&Y survey shows that 55% of U.S. companies now are expecting asset prices to remain at current levels over the next six months. The same survey indicates that, as E&Y puts it, “36% of U.S. companies say they will pull the trigger on an acquisition in the next year.”

Private Equity Prospects

This encouraging domestic M&A news occurs in a stronger global environment, as well, with 68% of large-cap companies around the world now calling their credit availability “stable to very positive,” the E&Y research shows.

In the private equity arena, increased momentum in 2011’s first half was reflected in bigger deals and larger exits, according to E&Y, including two record breaking IPOs.

While activity slowed in the second half because of the sovereign debt crisis, the deficit reduction impasse, and worries about a slowing economy — cutting PE deal values by 19%, to $138.1 billion — E&Y sees signs that January could “exhibit a ‘restart,’ characterized by improved financing conditions and more stable equity markets.”

According to Jeffrey Bunder, Ernst & Young’s global private equity leader, “more certainty in the economic outlook should fuel an increase in PE volume and bolster both acquisitions and exits. We do expect to see continued PE activity in healthcare, energy and technology in 2012, sectors that have remained active through choppy market conditions.”