James Klein, partner at Penningtons Solicitors, examines the outlook for M&A prospects in the technology sector.
M&A activity in the global technology sector had been on a steady upwards course since the beginning of 2009.
However, the third quarter of 2011 has seen the first general decline in M&A activity for several years. Is this slump a signal that confidence in the market is waning again or merely indicative of a temporary downturn?
Last year was a bullish year for technology M&A, as deal numbers and value both rose significantly when compared with 2009 figures. Clear trends emerged towards smaller, more strategically focused deals, particularly in the areas of smart mobile technology, software-as-a service (SaaS), internet and mobile video, cloud computing and social networking.
Optimism continued throughout the first half of 2011, as the value of global technology M&A deals in the second quarter reached $52.1bn, almost double that seen in the first three months of the year.
However, the third quarter of 2011 presented a different picture. Western Europe suffered more than most, with a 26 per cent fall in deal volume compared to the same period in 2010.
The decline may be explained by stock market fluctuations, the European debt crisis and the US budget stalemate, as many planned deals were shelved. A key issue, particularly for European acquirers, was the lack of affordable financing.
Many smaller corporates have found themselves priced out of the M&A market, and even larger companies have encountered tighter lending, as banks ponder the effects of the European debt crisis.
Nevertheless, there remain many reasons to be positive about the outlook for M&A in the technology sector.
While volatile, the third quarter still featured a number of substantial deals, such as Hewlett Packard’s purchase of Automomy, a British software firm, for $10 billion, and Google’s all-cash buyout of Motorola for $9.8 billion.
Bloomberg reports that the UK has seen only a slight decline overall in both deal numbers and volume throughout 2011.
More importantly, appetite for M&A in the UK remains strong. In a survey carried out by Ernst & Young, 50 per cent of 120 senior executives in the UK said they were planning acquisitions in the next 12 months, to counteract limited domestic growth.
Around a third of those surveyed also planned to make strategic divestments in the coming year, primarily to focus on core assets and enhance shareholder value.
Excess working capital was the preferred source of funding for deals, with only a third of respondents planning to use debt.
Google’s acquisition of Motorola is also evidence of a further trend: the use of M&A to gain control of valuable patents. As technology becomes more complex and inter-connected, supremacy in the technology sector is increasingly being challenged through the courts, putting a premium on intellectual property.
Another example of the so called ‘patent wars’ is the dispute currently being waged between Apple and Samsung over ownership of touch-screen technology used in mobile phones and tablets.
Companies which have traditionally focussed upon one area of production are now using M&A to integrate new capabilities in search of growth and to satisfy consumers who are increasingly demanding everything in one package.
M&A is often the quickest and most efficient way to add a new technology to a portfolio and, in such a fast growing market, may end up being the difference between growing with the pack or being left behind.
Nevertheless, both financial and strategic buyers should remember that thorough due diligence and timely integration planning are essential for a successful technology merger.
