Technology Mergers and Acquisitions Update: Q3 2011

Q3 2011 - Software M&A Update

After a strong start, M&A slows for Q3

According to The 451 Group, and our own research, from the start of July until the middle of August, dealmaking followed the same arc of recovery that it had tracked for most of 2011. And then, seemingly overnight, the stability and confidence vanished, swept away by renewed concerns about the state of the global economy. That left M&A in the back half of the quarter looking a lot like it did in the recession years of 2008 and 2009, rather than earlier this year. Of course, the abrupt decline in M&A during the second half of the third quarter correlates very closely with the performance of the equity market during Q3. After topping out at nearly 2,900 in early July, the NASDAQ had plummeted to just above 2,300 a mere month later.

Acquisitions became less of a priority in the second half of the quarter, as the storm clouds that have been swirling over the global economy since the summer have left dealmakers uncertain about what – if anything – they should be buying right now. A number of recent economic indicators appear disconcertingly similar to levels we sank to during the Great Recession. Meanwhile, many of the problems that got exposed during the economic downturn have proven intractable, whether we look at the stubbornly high 9.5% unemployment rate or the lingering mortgage mess.

Compounding all of the worries around this is the sobering realization that what got us out of the first part of the recession – for the most part, federal spending – isn't going to be available to get us out of what could be the next recession. Don't forget that the historic downgrade of the creditworthiness of the US came during the third quarter.

As the possibility of a double-dip recession started getting talked about in August and September, no area of the market got hit harder than the IPO market. The pipeline got dramatically thinned out in the third quarter as companies that had put in their paperwork pulled their S1’s, either to stay independent or become part of a larger company. Both WageWorks and Trustwave withdrew their S1s in early August, while BlueArc, The Telx Group and Force10 Networks all dual-tracked their way into trade sales in the past three months.

Against those five IPO candidates in the US that didn't make it to market in the third quarter, we tallied only two enterprise technology vendors that actually did manage to get public. And both, to be candid, have had rather muted debuts. Tangoe, which went out in late July, and Carbonite (Nasdaq: CARB), which followed in early August, both trade at essentially where they came out and have created just $700m of market value between them.

The third quarter saw promising firms such as Jive Software and Eloqua put in their IPO paperwork in August.

Given the dramatic decline in M&A activity during Q3, the remainder of 2011 is shaping up to be a tough time for dealmaking. The year had been tracking to a level of dealmaking that basically put it at twice the rate we saw during the Great Recession. But now the recovery seems much less certain, as the broader economic woes appear to be increasingly weighing on M&A.

And those concerns may get even heavier before the year is out. ChangeWave Research surveyed more than 2,600 consumers in the first half of September about their expectation for the economy through the end of 2011. Fully three out of five respondents (61%) said they expected the economy to worsen in the coming three months, compared to just 8% who said it will improve through the end of year. The sentiment hasn't been that heavily bearish since March 2009.

Overall, Q3 doesn't appear to raise many concerns for the tech M&A market. After all, compared to the same quarter last year, spending on July-September deals ticked up a healthy 20% to $62bn.

A few notable announced M&A transactions for Q3 2011 included:

ü Google (Nasdaq: GOOG), looking to bolster its mobile business through both hardware and patents, acquired Motorola Mobility. The $12.5bn deal will cost the search giant twice as much as it has spent, collectively, on all of its previous M&A.

ü Hewlett-Packard (NYSE: HPQ) started an overhaul of its business, perhaps looking to divest its PC unit while, simultaneously, acquiring Autonomy Corp (LSE: AU.L) for $11.7bn, which stands as the largest software acquisition in seven years.

ü Broadcom (Nasdaq: BRCM) announced its largest-ever purchase, paying $3.9bn in cash for NetLogic Microsystems (Nasdaq: NETL). The transaction valued the maker of network communications processors at more than 9 times revenue.

ü Buyout shops also remained active, with Blackstone Group and Providence Equity Partners each erasing a publicly traded company in a pair of billion-dollar take-privates.

2011 M&A activity, month by month

Period	Deal volume	Deal value
September 2011	279	$8.5bn
August 2011	335	$40.2bn
July 2011	319	$12.9bn
June 2011	332	$14.3bn
May 2011	322	$27.2bn
April 2011	288	$25.7bn
March 2011	300	$63.7bn
February 2011	285	$10.3bn
January 2011	323	$11.7bn