As global financial markets and developed economies are finding it hard to cope with volatility and lack of visibility, global technology mergers and acquisitions (M&A) show no signs of fatigue. Against the backdrop of a difficult M&A environment across most other industries, the technology M&A market continued to grow steadily this year: according to 451 Group, more than 3,300 technology transactions were completed since the beginning of the year, for a total value of $237 billion. This is more than for the whole of 2010, both by volume and value.
An unabated need to innovate
Consumers continue to flock to mobile internet, into the cloud, into online shopping, and are allocating ever more time and money for their digital lifestyle. Enterprises are in constant need for improved efficiency. The borders between hardware, software and services are being continuously redefined to drive consumer appeal and enterprise performance. Despite a somewhat reduced availability of capital, technology start-up activity remains very high across the world, and notably in Europe, with places such as London, Berlin, and Stockholm at the forefront. The speed of innovation and harsh competitive environment continues to drive investment and therefore significant M&A activity in the technology industry at large. The “buy versus make” decision continues to be predominantly a “buy” decision for many technology companies.
The means to spend
The technology industry as a whole is cash flow positive and has been accumulating cash for years. A look at the balance sheets of 14 of the largest global technology companies reveals a cumulated cash balance of almost $300 billion and low levels of debt. And while some companies use their cash surpluses for share buy-backs or dividends to their shareholders, these war chests are largely available for strategic acquisitions. Valuations of technology companies have also held up well through this turbulent year with the FTSE TechMARK 100 index gaining 4.6% over last twelve months compared to the FTSE 100 benchmark index, which is down by 3.9% (as of 30/11/2011). Both cash and stock are available in quantities for the right deal.
A global game
Technology M&A is a global phenomenon. The search for the “next big thing” crosses borders. US technology companies continue to be the most active acquirers of start-ups and mature businesses across the globe. Since 2000, over 75% of global technology M&A was executed by North American acquirers who have been buying predominantly US-based companies but still remain the largest buyers of European companies. There is little sign of this changing any time soon.
Overall however, the number of cross-border transactions is steadily on the increase, as the mining for great talent, intellectual property and growth is now elevated to an international level. UK and European companies clearly benefit from this trend: over the last 10 years, over a third of European technology businesses have been sold to non-European buyers, including Asian companies which are increasingly looking to Europe for reach and intellectual property.
Valuing the future, not the present
Valuations of technology M&A transactions continue to defy established measures of value based on historic or current profitability. There are often no profits to be valued. Technology companies are acquired to deliver future growth, either directly or indirectly. And while there is indeed a large proportion of M&A transactions in response to more traditional market consolidation objectives, “gap-filling” technology acquisitions that deliver technology components into a wider solution or product are those that command premium valuations.
Scarcity remains the most important factor driving value: a unique technology solution that solves a problem shared by several potential acquirors is a key ingredient of the recipe for a successful sale. Timing is therefore also essential as scarcity is not a constant. Selling early means that scarcity is not yet understood by the buyer, selling late means it was replaced by commodity. Finally, relative size comes into play as well: a small start-up acquisition by a large corporation goes unnoticed at the buyer level but can command very high valuations.
Small is beautiful
Nowadays, only multi-billion dollar technology transactions are making the headlines of the financial media. Yet, most companies targeted in technology M&A are small to mid-sized.
Google, one of the world’s most active acquirers of technology companies, has acquired more than 20 companies over the last 12 months, of which it is estimated that only three companies had price tags in excess of $150 million. Large corporations are keen to acquire smaller teams driven by entrepreneurial spirit that can bring new perspectives, are easy to integrate and can rapidly adapt to change.
Getting bought, not sold
The volume of technology companies of all sizes seeking to be bought is staggering. Virtually every start-up is notionally for sale from the day it is formed.
After all, this is the model followed by the venture capital industry that plays a dominant role in the financing of innovation: investing early and taking risks for a significant return on capital on a three to five-year time horizon. Yet, not all technology companies get bought, even fewer for a good price. There are the start-ups that do not survive to see this happen, those businesses that survive but that are strategically irrelevant.
But being strategically relevant is not all. To be bought, a company must be able to cut through the noise of the competitive landscape and be visible to its potential suitors. Easier said than done: A blue chip technology company is typically approached with a new M&A opportunity on average once a day, sometimes several times a day.
So getting a technology company to be bought takes a lot of preparation and planning. Long gone are the days of the internet boom, where companies were acquired for a yes or a no.
As far as the future is concerned, and 2012 in particular, the strong drivers for M&A in the technology industry will clearly remain. Technology businesses with proven models and clearly identified scarcity value will continue to be attractive acquisition targets.
Peter Globokar is managing director in the London office of Mooreland Partners, an independent, global technology M&A advisory firm.