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Is tech M&A positioned for an upturn?

Roy Harris | Nov. 30, 2011
If many U.S. deal-watchers have been shaking their heads at the lower overall numbers for technology-based merger transactions closing in the third quarter, there are some who believe that underlying trends carry hope for a potential revival of M&A in the sector.

If many U.S. deal-watchers have been shaking their heads at the lower overall numbers for technology-based merger transactions closing in the third quarter, there are some who believe that underlying trends carry hope for a potential revival of M&A in the sector.

For one thing, seven mega deals --- those valued at more than $1 billion -- were among those that closed in the period. That's the most such $1-billion-plus transactions in four quarters, according to PricewaterhouseCoopers' research. In part because of the seven sizable deals, average tech-sector M&A value climbed to $341 million in the latest period, sharply above the $275-million average recorded for all of 2010. [See report attached at end of this story.]

The 78 tech deals that PwC noted had closed in the third quarter represented a decline from 104 in the prior year's Q3. Its research showed that the leading tech groups within the sector were software and IT services, which together contributed 49% of the total deal value, and 58% of its volume. Meanwhile, Internet deals, the largest component of deals by value earlier this year, declined in Q3 to 15 deals closed, with $3.8 billion in value. In this year's second quarter, 26 Internet deals had closed.

Part of the reason for the year-to-year decline in the overall number of deals in the tech sector, according to PwC analysts, may have been that potential acquirers were watching chaotic U.S. and world events. Those included the U.S. debt-ceiling brinksmanship, the furor about a U.S. credit-rating downgrade, and political posturing at home, and the Arab Spring uprisings and Greek and other default threats abroad. The continuing 9%-plus domestic unemployment rate and low consumer confidence, of course, ran like a recurring theme under all the other events.

Still 'Active Part of the Toolkit'

One piece of evidence that technology dealmakers were monitoring these trends: a strong July that turned into successive declines in deal volume for August and September. In the end, the volume of closed deals for the quarter dipped slightly from 2011's second quarter, "but could not live up to historical precedents, dropping almost 25% from Q3" in the prior year, according to the report.

Initial public offerings in the tech arena also reflected the disturbing economic news, showing a 77% drop in Q3 IPOs -- to just five -- and eventually coming to "a screeching halt," compared with the second period. (Reports of an impending Facebook IPO, of course, continue to circulate, and strengthen this week. It would follow a giant Groupon IPO in early November.)

Still, "tech M&A will remain an active part of the corporate toolkit as innovation buys outweigh economic gloom," the report said, adding that "cloud computing continues to be the one driving force behind tech companies' strategy decisions."

 

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