M&A Update
by, Aaron Solganick, Generation Equity Advisors LLC
After a recession-induced pause, the tech industry is back and M&A deals, including number and value, are rising overall in the U.S. However, the numbers are mixed quarter-by-quarter around the world and a cautionary M&A environment is still in place. The M&A environment is still very fragile and you see it in a slight Q2 2010 slowdown in global M&A activity.
Tech M&A is fueling growth globally, however.
A year ago, it was difficult to sell your company during such a distressed economy. According to a report by PricewaterhouseCoopers' Technology Transaction Services, “Most companies shelved their M&A activities and concentrated on restructuring operations and conserving cash."
Today, we are seeing the beginning stages of an M&A “feeding frenzy.”
Global M&A
Announced global M&A (all industries) totaled US$976 billion so far in H1 2010 (YTD), on par with H1 2009 (US$977 billion). Q2 activity totaled US$454 billion, down 10% from Q2 2009 and down 13% from the previous quarter. US targets accounted for 35% of global activity in the year to date, ahead of Europe (US$227 billion, 23%) and Asia Pacific (US$186 billion, 19%).
Announced M&A targeting the US reached US$339 billion in the year to date, down 5% from H1 2009 (US$358 billion). Q2 activity totaled US$171 billion, up 2% from Q1 but down 15% from Q2 2009 (US$202 billion).
Europe M&A
According to CorpFin, Europe saw a 17.5% decrease in European M&A and Equity Capital Market transactions announced during Q2 2010 with only 2,375 deals compared to 2,879 transactions in Q1 2010.
EUR148.7 billion worth of transactions were announced in Europe in Q2 2010, down by 16.1per cent on Q1 2010.
The UK saw a 15.5 per cent decrease in the number of UK mergers and acquisitions and equity capital market transactions announced during Q2 2010 compared to Q1 2010, data from Experian shows.
GBP46.2 billion worth of transactions were announced in the UK in Q2 2010, down by 8.7 per cent on Q1 2010.
According to Thompson Reuters Q2 2010 M&A Review, European targeted M&A announced in Q2 2010 totaled US$122 billion, up 16% from the previous quarter (US$105 billion) and up 7% from Q2 2009 (US$114 billion). Year to date activity reached US$227 billion, down 23% from H1 2009 (US$295 billion). This could mark the worst start of the last 10 years in Europe.
Asia Pac. M&A Down
Announced M&A targeting the Asia Pacific region reached US$89 billion so far in Q2 , down 9% from the previous quarter (US$97 billion) and down 32% from Q2 2009 (US$130 billion). Year to date activity totaled US$186 billion, down 1.1% from H1 2009 (US$188 billion).
Buyside Financial Sponsor M&A on the Up
Global private equity backed M&A totaled US$40 billion in Q2 2010, up 33% from the previous quarter and up 125% from Q2 2009 (US$18 billion). Year to date activity reached US$70bn, up 102% from H1 2009 (US$35 billion).
Cross Border M&A (EMEA/U.S.)
Acquisitions abroad grew for the 5th consecutive quarter to reach US$197.5 billion in Q2, up 10% from the previous quarter. Year to date activity totaled US$376 billion, up 69% from H1 2009 (US$223 billion). Cross border M&A accounts for 39% of deals announced in 2010.
Withdrawn M&A Hits $143 billion
With Prudential’s withdrawal of its US$35.5 billion bid for AIA, global withdrawn M&A activity for year-to-date reached US$143 billion up 29% from the same period last year.
Tech M&A
According to The 451 Group, spending on tech M&A in the second quarter surged to the highest quarterly rate since the credit crisis erupted, driven by a return of some of the largest technology buyers. Overall, deal makers announced 773 transactions, with a total value of $62bn. The Q2 total, which represented a doubling of spending from the first three months of the year, topped the previous record in the ‘new normal’ environment by slightly more than 10%.
IPO Activity (U.S.)
IPO activity through the first six months of 2010 approached pre-recession levels of five and six years ago, with total new filings in the U.S. rising to 128 so far in 2010 from 15 during the same period of 2009, and priced IPOs rising to 62 from 14 in 2009. Within the technology sector, priced offerings rose correspondingly to 20 in 1H 2010 compared to six in 1H 2009,
What’s driving current M&A activity?
Acquisitions "really matter to us," Google Chief Financial Officer Patrick Pichette said in an earnings call in April.
The rise in activity reflects a return to normal after a bruising recession all but killed the appetite of tech companies to make deals. Low interest rates have helped drive up tech shares, fueling the M&A frenzy.
Both companies and private equity firms are currently sitting on piles of cash. In fact companies are sitting on the highest percentage of cash since the 1960’s. Because companies have cut costs and reduced inventories even as profits have recovered, cash balances have climbed to $1.84 trillion, according to data from the Federal Reserve.
The top 10 technology companies currently have approximately $250 billion in cash. Cisco has nearly $40 billion in cash reserves; Microsoft, $37 billion; and Apple, $23 billion. They understand that if they don't put the money to use on deals, shareholders will start lobbying for dividends.
U.S. based Private equity firms are sitting on an estimated $500 billion in cash. Those PE firms with dry powder are bidding aggressively, in the United States, Europe and Asia. One of the biggest and costliest deals so far this year (as of May 4, 2010) was the acquisition of a stake in the Interactive Data Corporation, a financial market data company, by two private equity firms, Silver Lake and Warburg Pincus, according to Capital IQ, which tracks the industry. A third, unidentified private equity partner dropped out because the price was too high.
The two buyout shops paid $3.4 billion, or $33.86 in cash for each share of I.D.C. — a premium of nearly 33 percent to the going price in the stock market. Technology companies often command high valuations.
What Buyers Want
Companies that cut back over the past few years now are feeling they need to catch up and acquire technology. Buyers are paying more for small, innovative companies in high-growth areas with long-term potential, according to a report by Ernst & Young.
Fueling M&A action is an uptick in initial public stock offerings and VC investments in tech firms. This year is shaping up as the best for tech IPOs since 2007, when there were 59. Already, a dozen venture-backed tech IPOs have been filed — and venture capitalists such as Geoff Yang, a partner at Redpoint Ventures, expect more than 50. When VC’s open up their checkbook after a bad economy, that is when small companies emerge and become big, like an Apple or Google.
There seems to be an upcoming feeding frenzy in effect. After you’ve been starving for a long time, you’re really anxious to eat.
One booming sector to note is in cloud computing. IBM predicts the cloud computing market will mushroom to $126 billion by 2012 from $47 billion in 2008.
Recent Notable Tech M&A Deals
On May 12, 2010 - SAP paid $5.8 billion to acquire database maker Sybase in one of the biggest tech deals of the year. A recent flurry of M&A wheeling-and-dealing included IBM, which acquired Cast Iron Systems to bolster its standing Internet-based computing. And then in June, IBM acquired private software vender Coremetrics to add web analytics capabilities. Apple acquired Siri, maker of a voice-recognition application, and Intrinsity, a chip designer. Hewlett-Packard snapped up Palm for $1.2 billion. Salesforce.com acquired Jigsaw, maker of a Web-based business address book, for $142 million. And Google acquired Picnik, On2 Technologies and Aardvark in the past few months to "build on (Google's) existing focus areas and to bring new talent and new technology."
Sources: Thompson Reuters, The 451 Group, CorpFin, Generation Equity Advisors Research and others.
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