Merger & Acquisition (M&A) activity in the technology sector has remained buoyant in 2011, according to new PwC analysis.
The strategic nature of many deals meant that, while the volume of deal activity was 10% lower compared with 2010 (354 deals versus 393 deals), average deal size continued to increase and the total deal value of €69 billion for 2011 was approximately 90% higher than the 2009 low.
Rob Morgan, Technology Sector leader in Corporate Finance at PwC, said: “Strategic acquisitions continue against a backdrop of long-term mega-trends playing out across the technology landscape. These trends are impacting the way technology providers address the changing needs of business, governments and consumers.
“Cash remains king. At a time when debt is hard to raise those with cash are doing deals – and technology companies, particularly at the larger end of the market, have significant cash reserves which they are looking to deploy through M&A.”
Looking at the top 10 deals of the year, it is notable that both corporate and private equity buyers were prepared to deploy substantial sums of capital in the fourth quarter, at which time the capital markets were in hibernation. Three of the year’s four largest deals globally – including the €8.2b purchase of the UK’s Autonomy by Hewlett-Packard – were completed in the fourth quarter.
Philip Shepherd, Technology Sector leader in Deal Strategy at PwC, said: “A clear trend in 2011 has been the increased value placed on Intellectual Property with patent acquisition being the driver behind a number of deals, particularly in the area of mobility. The ground-breaking purchase of Motorola’s handset business by Google is a good example of this.”
Looking forward, hot spots for technology sector deals in 2012 include:
Cyber Security
Vast amounts of data are available more readily to more people than ever before, but there is equal recognition that managing and securing this data explosion is increasingly difficult. The divide between work and home is blurring, with constantly connected mobile users now working in ways that create challenges for corporate IT in securing their systems without damaging productivity.
Existing providers are likely to seek acquisitions, within a currently highly fragmented market, that can rapidly differentiate their offerings with enhanced levels of security.
Philip Shepherd, Technology Sector leader in Deal Strategy at PwC, said: “A good example of this is Intel’s acquisition of McAfee for $7.8b. It highlights the importance of security for large established technology businesses. Some commentators attributed the deal to Intel’s long-term plan to embed security in its chipsets, while others focus on Intel’s desire to move further into the high-growth mobile market, where McAfee has a range of security products.”
FinTech
The financial technology sector remains buoyant, as technology providers try to meet the evolving needs of financial institutions who require significant investment in their systems to meet the wave of structural and regulatory changes being forced on the industry. For example increasing regulation as a result of the financial crisis provides a strong driver for deal activity in the risk management sub-sector, as demonstrated by the acquisition of Thomson Reuters risk management unit, Kondor, by Vista Equity Partners.
Matt Cross, Technology Sector leader in Transaction Services at PwC, said: “For the software providers, there is an opportunity to capture synergies in a fragmented market that is ripe for consolidation, managing the cost base downwards and focusing on efficiencies. In many cases it is faster and more cost effective for software providers to achieve these objectives through acquisition rather than organic growth.”
Big Data
As the amount of data collected from internet connected devices continues to grow exponentially, the ability for technology to turn these raw data sets into valuable commercial information as well as new business models, is also increasing. The biggest transaction by far in this space was the purchase of Autonomy by HP for €8.2b. This was followed in December, with translation software group SDL announced the acquisition of the UK’s Alterian for £68m.
Rob Morgan, Technology Sector leader in Corporate Finance at PwC, said: “Technology providers that can fuse robust data analytics together with a deep understanding of their client’s business and end markets will prove extremely attractive targets throughout 2012.”
Smartphones
The continuing growth in the number of smart mobile phones underpins two strands of M&A activity: applications and components. The desire for differentiation is driving acquisitions that provide or enable content to be delivered.
In February HTC acquired UK mobile video specialist Saffron Digital for £30m. Saffron’s technology optimises the delivery of video to work across different mobile devices and the company plans to extend its capabilities into games and music.
Another strand to the smartphone M&A story is provided by the specialist chip manufacturers, which provide the components necessary to run the growing array of applications in mobile devices.
Matt Cross, Technology Sector leader in Transaction Services at PwC, said: “Whilst in terms of overall size, the UK is a relatively minor player in the global technology market; it is home to a large number of high-quality chip design companies, including Wolfson, ARM, CSR and Imagination Technologies. We believe that these and other world-class UK technology assets could prove to be attractive acquisition targets in the near future.”
Global perspective
Well-funded US corporate buyers have significant cash balances and continue to look for in-fill deals that expand their geographic reach and provide increased access to high growth markets. Looking ahead, however, we believe that US buyers will face fiercer competition from Indian, Chinese, Japanese and other Far Eastern acquirers.
Commenting on the outlook for technology M&A, Rob Morgan, Technology Sector leader in Corporate Finance at PwC, said:
“Although the current volatile economic climate looks set to continue, M&A in the tech sector is in a good position to remain buoyant, underpinned by the structural trends impacting the sector. That said it continues to be a challenging deals environment and the winners will be those who focus on the key deal relationships, prepare well for evolving market conditions and take a global perspective, both in terms of finding targets and building relationships with potential strategic acquirers.”