by Roy Harris

Is Tech M&a Positioned for an Upturn?

News
Nov 29, 20114 mins
IT StrategyMergers and Acquisitions

If many U.S. deal-watchers have been shaking their heads at the lower overall numbers for technology-based merger transactions closing in the third quarter, there are some who believe that underlying trends carry hope for a potential revival of M&A in the sector.

If many U.S. deal-watchers have been shaking their heads at the lower overall numbers for technology-based merger transactions closing in the third quarter, there are some who believe that underlying trends carry hope for a potential revival of M&A in the sector.

For one thing, seven mega deals — those valued at more than $1 billion — were among those that closed in the period. That’s the most such $1-billion-plus transactions in four quarters, according to PricewaterhouseCoopers’ research. In part because of the seven sizable deals, average tech-sector M&A value climbed to $341 million in the latest period, sharply above the $275-million average recorded for all of 2010. [See report attached at end of this story.]

The 78 tech deals that PwC noted had closed in the third quarter represented a decline from 104 in the prior year’s Q3. Its research showed that the leading tech groups within the sector were software and IT services, which together contributed 49% of the total deal value, and 58% of its volume. Meanwhile, Internet deals, the largest component of deals by value earlier this year, declined in Q3 to 15 deals closed, with $3.8 billion in value. In this year’s second quarter, 26 Internet deals had closed.

Part of the reason for the year-to-year decline in the overall number of deals in the tech sector, according to PwC analysts, may have been that potential acquirers were watching chaotic U.S. and world events. Those included the U.S. debt-ceiling brinksmanship, the furor about a U.S. credit-rating downgrade, and political posturing at home, and the Arab Spring uprisings and Greek and other default threats abroad. The continuing 9%-plus domestic unemployment rate and low consumer confidence, of course, ran like a recurring theme under all the other events.

Still ‘Active Part of the Toolkit’

One piece of evidence that technology dealmakers were monitoring these trends: a strong July that turned into successive declines in deal volume for August and September. In the end, the volume of closed deals for the quarter dipped slightly from 2011’s second quarter, “but could not live up to historical precedents, dropping almost 25% from Q3” in the prior year, according to the report.

Initial public offerings in the tech arena also reflected the disturbing economic news, showing a 77% drop in Q3 IPOs — to just five — and eventually coming to “a screeching halt,” compared with the second period. (Reports of an impending Facebook IPO, of course, continue to circulate, and strengthen this week. It would follow a giant Groupon IPO in early November.)

Still, “tech M&A will remain an active part of the corporate toolkit as innovation buys outweigh economic gloom,” the report said, adding that “cloud computing continues to be the one driving force behind tech companies’ strategy decisions.”

‘Transformational’ Deals

Ticking off the giant deals announced in the quarter, PwC sounded positive about the possibility that they may increase in the near future.

Leading the “transformational deals” announced was Google’s $12.5 billion acquisition of Motorola Mobility, a dedicated Android partner spun off by Motorola less than 10 months ago. “The acquisition represents Google’s first entrance into the hardware market with the pending addition of Motorola’s suite of mobile products,” the PwC report said.

As Hewlett-Packard announced that it plans to consider a spin-off of its PC division (later cancelled), it also announced the acquisition of UK software provider Autonomy Corporation for $11.7 billion in cash.

In addition, Broadcom announced the acquisition of NetLogic for $3.9 billion, expanding the chipmaker’s market share in the growing segment of streaming video and data.

Private Equity Factors

“While corporates drew attention with some of the largest technology deals announced in several years, private equity firms remained active, with several deals topping $1 billion being announced during the quarter,” PwC said. They include:

  • Blackstone’s acquisition of healthcare revenue and payment cycle management company Emdeon in a public-to-private transaction valued at $3 billion.
  • Providence Equity Partners’ $1.6 billion acquisition of Blackboard Inc.; Providence announced the deal before completing its $1.9 billion public-to-private acquisition of SRA International announced in Q211.
  • Hellman & Friedman’s acquisition of Sungard’s Higher Education business for $1.8 billion in a transaction that will combine the company with existing portfolio company Datatel.

Among the largest deals that closed in the quarter:

  • Texas Instruments’ acquisition of analog chipmaker National Semiconductor for $6.4 billion.
  • CenturyLink’s $3.2 billion deal, in cash and assumed debt, for Savvis, improving CenturyLink’s managed hosting and colocation services.
  • Golden Gate Capital and portfolio company Infor’s acquisition of Lawson Software for $1.9 billion.
  • Electronic Arts’ $1.3 billion deal for PopCap Games, in that industry’s largest acquisition since the merger of Activision and Vivendi.

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PwC US Technology M&A Insights Q3 2011.pdf

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