November 2016 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Quotes from Ben Boissevain are in bold below.
If any sector, over the past six months or so, can lay an overwhelming and irrefutable claim to being a mergers & acquisitions (M&A) powerhouse it is technology – an environment with innovation at its heart, underpinned by regular multi-billion dollar transaction activity.
Certainly, in recent months, M&A in the tech sector has been a veritable hive of activity, encompassing hot issues such as the ongoing sectoral transformation being caused by the emergence of disruptive cloud, mobile, social and Big Data analytics technologies, all brought to the fore via a plethora of deals that rank at the upper end of the noteworthy scale.
Indeed, the grand nature of the tech M&A deals struck this year in particular is evident in Dealogic’s ‘Global M&A Review: First Half 2016’ – stats which make for encouraging reading for any tech sector aficionado.
Boiled down, the Dealogic analysis reveals that tech was the top sector for M&A activity in the first half of 2016, with a total value of $294.8bn – a substantial chunk of the $1.71 trillion generated across all sectors. This represents an increase of 6 percent year-on-year and is also the second highest 1H volume on record, trailing the $304.6bn 1H volume seen in 2000.
Further Dealogic revelations regarding tech sector M&A in 1H 2016 include: (i) tech led global M&A for the first time on record; (ii) the US was the leading acquirer for global tech with $139.1bn, followed by China with $97.9bn; (iii) Microsoft’s proposed $26.2bn acquisition of LinkedIn, announced in June 2016, is the fourth largest M&A deal in 2016 to date; and (iv) the Microsoft/LinkedIn transaction is one of 10 tech sector M&A deals this year valued at $20bn or more, four of which were spin-offs.
Impressive as these tech M&A facts and figures appear, it is pertinent to recognise that ongoing macroeconomic uncertainty has served to suppress deal valuations to an extent in 2016. However, that said, there will undoubtedly be a multitude of dealmaking opportunities for companies to sink their teeth into in the months ahead. Furthermore, the strategies that companies in the tech space utilise will be a key component of their profitability aspirations in the short, medium and long-term.
For the moment, M&A activity throughout the tech sector is booming as acquirers seek innovative technologies and global expansion.
According to Ben Boissevain, managing partner at Bois Capital LLC, the rise of M&A deal activity in the tech sector over these past months can be attributed to a number of factors. Start-up tech companies have been very innovative in the cloud, wireless and analytics sectors, which is being followed by a new wave of innovative technologies, such as artificial intelligence, robotics and the Internet of Things (IoT). Large cap tech companies, such as Microsoft, Cisco and IBM, have significant cash on their balance sheets which enable them to make acquisitions. Large cap tech companies need to acquire innovation to stay ahead in innovative technologies. And private equity firms, increasingly active in the tech sector, have substantial dry powder to make acquisitions.
“The ‘Uber effect’ of the game-changing use of technology is the major trend sweeping through the tech space currently,” asserts Nick Winters, a partner and head of technology at Kingston Smith. “The most successful companies in traditional industries are disrupters with high calibre technological solutions, and it is these that are driving M&A in the tech space. The UK, with lots of growing tech companies in well-funded positions, is perfectly placed to take advantage of this through its mix of traditional industries, tech clusters and geopolitical situation. So we see every reason for record levels of tech M&A in due course.”
“For the moment, M&A activity throughout the tech sector is booming as acquirers seek innovative technologies and global expansion.”
For Daniel Domberger, a partner and co-lead of the global Media & Technology team at Livingstone Partners, the most compelling reason for the rise in tech sector M&A seen in recent times is that innovative technology utilisation offers the surest route to growth for companies. “All the factors driving M&A volumes across all sectors – especially cheap money and capital availability in a low-returns environment – are intensified in tech as buyers and investors focus their attention on the space most likely to deliver higher returns,” states Mr Domberger. “And this intense competitive focus in turn drives valuations.”
Tech sector lessons
Among the tech sector M&A transactions that have taken place over the past year, several have been especially conspicuous in their size, scope and significance. These include: the acquisition of Rackspace by Apollo Global; the deal which saw Oracle acquire LogFire; the sale of UK-based ARM Holdings to Japan’s Softbank Group; Indian IT giant Tech Mahindra acquiring UK firm The Bio Agency; and the previously mentioned Microsoft/LinkedIn megadeal.
“The sale in June 2016 of ARM Holdings to Softbank Group for £24.3bn ($32bn), a 43 percent premium to its stock market value, is the biggest tech M&A story of the year,” says Mr Winters. “ARM has for a long time been a much celebrated British success story and the sale to Softbank underlines this. The deal was also an immediate post Brexit boost to the sector, underlining that the UK is open for business, that it is very strong in tech and online and highly attractive for overseas buyers.”
Elsewhere, the Tech Mahindra/Bio Agency deal is a good example of how M&A in the tech sector is continuing the theme of industry lines being blurred through consolidation and of technology driving change. And Apollo Global’s $4.3bn acquisition of Rackspace exemplifies the expanding role of private equity firms in tech sector M&A. “For companies interested in selling, private equity firms that specialise in the tech sector should be on their target list,” says Mr Boissevain. He adds that companies with intent to sell should “understand recent transactions in their sub sector in order to approach the right targets and set valuation expectations”.
Jeff Liu, leader of Global Transaction Advisory Services for the technology sector at EY, believes that it is a company’s ability to identify and approach suitable targets which is the key to achieving long-term growth. “We expect the wave of M&A related to Big Data analytics to continue, as tech and non-tech companies alike seek to accelerate the implementation of next generation analytics capabilities using machine-learning and cognitive computing to offer enhanced data visualisation, customer experience analytics and business intelligence to their partners and end users,” he says.
Increasing regulatory compliance
With tech companies looking to utilise M&A even further to help them exploit new markets, there is the potential for such expansion to be accompanied by an increase in complex regulatory scrutiny and all the attendant compliance challenges this brings – not to mention the hidden reputational risks associated with targeted companies.
“Tech companies on the buy side should be aware of the regulatory and compliance challenges in each jurisdiction and perform thorough due diligence before closing a transaction,” says Mr Boissevain. “Each country has its own legal and cultural issues that should be thoroughly understood.”
In the view of Mr Domberger, the level of due diligence required of tech sector M&A transactions is not going down; rather, it is increasing, and will continue to do so. “It remains the best way for a buyer to inform itself about and protect itself from risks in a target, including reputational risk,” he explains. “The biggest compliance challenges tend to come from the US rather than other territories, although Europe does what it can to keep up and impose, or arbitrarily change, complex regulation. Complex compliance regimes are not unique to tech – it is just that fast growth creates new challenges which provoke regulatory responses.”
Tech sector M&A outlook
Depreciation of the sterling may mean that inward investment in tech companies increases, resulting in more UK companies being acquired by overseas buyers, particularly those in the US or India. More broadly, M&A activity in the tech sector, particularly in Western Europe, should remain strong for at least the next year and may possibly step up a gear, according to Mr Winters. “We believe that the tech sector in particular will be largely immune to any potential Brexit fallout, and that strategic stories and the scope for growth will simply blow many regulatory and economic growth issues out of the water,” he says. “We also expect the demand for digital transformation and analytical capabilities to continue as the successful industrials continue to improve their digital offering to keep pace with their rivals and new market entrants.”
Mr Liu projects that tech sector M&A is going to continue at a near-record pace for the foreseeable future, with activity levels being driven by the disruptive digital technologies that the sector itself is bringing to the market. “Tech is a sector undergoing major transformation,” he opines. “We’ve already seen 15 deals valued at more than $1bn dollars in August and September, and I expect global technology M&A in 2016 to match or surpass last year’s record pace.”
With all the signs pointing to a market that will grow rapidly in the months, if not years, to come, the tech sector could well find itself entering into another bubble, a possibility that is by no means unlikely. For Mr Winters, the cutting edge and exponential growth nature of technology means that the sector will attract much higher multiples than other sectors, as the skill sets that are being acquired are scarce. “The ongoing automation and information revolutions require traditional industries to acquire digital capabilities so that they do not lose ground to competitors,” he explains. “The demand for those capabilities is therefore high and the supply scarce, leading to increasing valuations. For now, this increase appears justifiable rather than it being a bubble based on false expectations. The bubble risk is always there, but for the ‘home run’ investment stories, bubbles are rarely a problem as long as shareholders avoid selling in a correction phase.”
On a high
Any organisation which sets its sights on acquiring a technology-driven company with substantial technological assets is taking a dip into potentially turbulent waters. Alongside the range of challenging issues that come with the M&A territory, such as preparation and strategising, red flag spotting, an understanding of exit alternatives, intellectual property (IP), corporate governance, tax planning and legal cleanups, the acquirer and the acquired must also comply with the requirements of increasingly stringent regulatory regimes which, if appropriate due diligence is not carried out by the parties concerned, can play havoc with even the best laid M&A plans.
That said, although concerns have been expressed that the sector could enter another bubble, M&A dealmaking within the tech sector is currently on a high, enjoying a period of substantial activity that is resulting in a major uptick in the number of well-structured deals being completed, with the sector concurrently exhibiting no obvious signs of being curtailed.
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