“Technology valuations will likely moderate unless macro conditions improve. But we'll continue to see strategically important deals with large premiums from time to time.”
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| ||Jeff Liu |
| ||Group Head, US Technology Lead Advisory, M&A |
Global technology M&A valuation trends appear to have disconnected from other industries in the third quarter of 2011. While the aggregate value of global M&A transactions in all industries experienced an 18% sequential and 21% YOY decline in 3Q1140, the corresponding figure for global technology M&A increased 8% sequentially and 22% YOY. What’s more, the average value per deal of technology transactions with disclosed values increased to $221 million, an 11-year high.
Volatility making it difficult to price and execute deals
Can technology M&A values continue to climb, or even maintain their current lofty level? Published reports have attributed the all-industry M&A decline on equities market volatility amid global economic uncertainty, which makes it difficult to establish stable valuations. All over the world, deal-makers are hitting the “pause” button because volatility is making it difficult to price and execute deals.41
Technology-focused deals appear to be the exception. “We’re in a down cycle economically,” states Jeff Liu, Group Head, US Technology Lead Advisory, M&A. “The drivers are obvious: concern about the possibility of defaults, both of sovereigns and of banks, and the slowing of growth in emerging markets because of concerns about their traditional export markets — the US and Europe.”
As a result, most buyers and sellers recognize that there will be a meaningful period of recovery required before markets and economies can return to a normal state of growth — or even a “new normal,” i.e., a lower level of sustained growth. And all of that feeds into decisions by buyers to reset valuations lower, and a weaker basis on which sellers can argue for higher valuations.
Disconnect in valuation expectations between buyers and sellers
The result is a disconnect in valuation expectations between buyers and sellers that will slow or kill deals, at least until market dynamics play out further. In terms of technology M&A, however, there are countervailing forces at work.
Jeff explains: “Technology is an industry driven by innovation and new markets. And right now, the industry is pursuing several major opportunities for new growth and new market creation that are quite independent of the economic environment.
The industry is seeking new growth and market creation
These include cloud computing, social networking, gaming and the hyper growth of smart mobility and mobile services. So with technology companies, there often is more emphasis on strategic acquisitions of companies than on looking for bargains in this challenging economic environment.” Jeff emphasizes that this view does not suggest a lack of discipline. “Technology buyers are still extremely disciplined about the near-term forecasts that factor into their decisions to buy companies,” he states.
What’s different is the weighting of strategic factors in the buying equation. “In technology, if a company sees strategic value in a mobile deal, or if a hardware company recognizes it is going to be important to have cloud-based solutions in their product portfolio, they are going to go ahead because of the strategic imperative represented by those assets.” Unfortunately, technology’s lofty 3Q11 average values may not be sustainable in the short term.
Are technology valuations moderating?
Buyers still have to reconcile valuations with top-line and bottom-line multiples. And as the global economy slows, the values being multiplied are shrinking. Of note, looking deeper into the technology industry’s $221 million average value for 3Q11, we see that the average value of deals announced in July and August was $271 million but September deals averaged just $104 million. So technology valuations may already be moderating.
While it’s difficult to predict whether technology deal valuations will actually fall in the next quarter — or by how much — the industry’s overall long-term prospects “are a no-brainer,” Jeff says. “There is a tremendous amount of technology innovation that is ready for prime time right now, and that is opening up new opportunities for young companies and forcing large companies to change,” he notes.
“When historians look back at this time, aside from the economic uncertainty that we know is here, they will say this period of technology innovation was as important as the emergence of the internet, or the switch from mainframe computers to PCs, in terms of the impact it is having on the consumer and on businesses.”
40 “Deals Dry Up as Markets Gyrate,” WSJ.com, 3 October 2011