The data is in and 2014 is shaping up to be a blockbuster year for M&A in the global technology sector. According to Ernst & Young, the aggregate value for technology M&A deals worldwide in the third quarter of 2014 set a new post-dotcom-bubble era record of US$73.7 billion, which is up 41% from Q2. In addition, by the end of Q3, the aggregate value for technology deals in 2014 already totaled US$192.7 billion, which is 2% higher than the total value for 2013. A new record was set since the year 2000 in Q3 for volume of deals, with 923 deals reported, while a record was tied since the first quarter of 2000 with 19 deals above $1 billion in the third quarter.
So what is driving M&A growth in the technology space? A highly liquid capital market and competition in the technology sector have created a favourable acquisition environment. Further, according to a recent report in Financial Worldwide, private equity funds are sitting on record amounts of liquid capital, acquirers have compiled substantial cash reserves, interest rates remain low for well-capitalized buyers and companies are looking to expand into new areas in order to generate growth and remain relevant.
According to Deloitte, some trends in the technology M&A market this year include:
- The convergence of technology, media and telecommunications (TMT): A shift is occurring with (i) large companies that began as either a technology, media or telecommunications company merging into a joint space as the market evolves, and (ii) companies that actually began as a combination of the three subsectors growing in both size and influence. Retail payment and processing, which has experienced rapid growth over the past few years stemming from increasing numbers of consumers purchasing goods and services online, is a prime example of TMT convergence. Mergermarket reports that in terms of deal count, TMT targets have attracted the most deals during any Q1-Q3 period on record.
- The monetization of technology trends such as cloud computing and big data/business analytics:
- Cloud computing – Interest in cloud computing continues to grow as it allows companies to minimize capital investments and reduce operating expenses.
- Big data/business analytics – Leading companies are using big data and business analytics as a central way to help generate better products, performance and profitability in order to surpass their competitors. The financial services industry is one of the industries driving the demand for big data as companies require larger market data sets and a greater level of detail for forecasts, predictive models and trading.The acquisition by SAP of Concur Technologies, a cloud-based travel-and-expense management vendor, was the top deal by dollar value in Q3 2014 at US$8.3 billion. It also demonstrates the importance of both cloud computing and big data analytics, as Concur is the latest in a series of cloud-based acquisitions by SAP and SAP plans to integrate its HANA system analytics platform to bring advanced analytics and performance to business-expense analysis.
- Cross-border M&A: Greater innovation and faster technology adoption in emerging markets such as Brazil and China is leading to more cross-border M&A deals as companies worldwide pursue market and revenue growth. According to Ernst & Young, in the third quarter of 2014 aggregate cross-border deal value increased 168% from the second quarter to US$32.7 billion.
- Divestitures: As certain technology sectors mature, companies are selling off underperforming product and service offerings and focusing on redefined “core” offerings, thus unlocking value and funding future acquisitions.
So what does this mean for technology M&A into Q4 2014 and into 2015? A survey conducted by KPMG found that 62% of respondents predict that the technology/media/telecom industry will be one of the most active in terms of M&A in 2015. The survey also revealed that the main trends that will drive M&A in this sector include mobile technology (54%), cloud computing (48%) and data analytics (47%), while the chief reasons for technology M&A deals will be access to intellectual property and/or talent (50%), bolt on acquisitions to enhance new products (42%), the acquisition of innovative products or technologies (41%), the desire to enter into markets (41%), and the desire to expand existing technology platforms (40%).
As pressure increases on technology companies to enhance value and generate growth, it is clear that M&A has become a preferred growth strategy, boding well for M&A activity in the last quarter of 2014 and into the new year.