Global technology M&A report: 1Q16 final look

Digital disruption, slow organic growth drive tech deals

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Tech M&A volume rises, value declines but ranks among top 10 quarters

Equity market turmoil and the increasing difficulty of obtaining debt appeared to have minimal impact on global technology dealmaking in the first quarter of 2016. Instead, accelerating digital disruption and slowing organic growth in various technology markets and geographies combined to boost 1Q16 deal volume, both year-over-year (YOY) and sequentially. Aggregate deal value declined YOY from 1Q15, but nosed above 1Q14 — the quarter that kicked off the past two years of blockbuster global technology deal making.

Highlights

Volume: At 1,002 deals, 1Q16 volume was up 8% sequentially and 2% YOY. 1Q16 is the third of the last four quarters to top 1,000 deals.

Value: 1Q16 aggregate value of disclosed-value deals was $66.7 billion, down 14% YOY and 65% sequentially (from 4Q15, which had the second-highest quarterly tech M&A value ever). The 1Q16 total was 0.1% above 1Q14’s $66.6 billion, and the ninth-highest tech M&A quarter ever in value terms.

Big-ticket deals: 14 deals rose above $1 billion, including 3 at $5 billion or more.

Blur: Non-tech-buyer volume rose 26% YOY to 147 deals. While the aggregate value of non-tech-buyer disclosed-value deals fell 15% to $16.7 billion, it was 25% of 1Q16 value — the same as last year and well above 2015’s quarterly average.

China: As seen in other industries, China’s tech buyers started the year strong, announcing 34 deals and $15.1 billion in disclosed value. More than half came in cross-border (CB) deals.

Hidden gems: After a slight dip in 4Q15, divestitures rose again to more than 150 deals in 1Q16. Three rose above $1 billion, including two targeting IT services business units at $5 billion and $3.1 billion, respectively.

Private equity (PE) buyers: $7.5 billion in disclosed-value tech deals by PE buyers falls into the middle of their typical range. But 1Q16 with 92 PE deals is the second-highest PE tech volume we’ve recorded. It suggests higher-value PE quarters ahead.

Analytics leads growth as 7 of 10 disruptive tech drivers increase volume; connected cars emerge

Seven of the 10 deal-driving trends shown below increased in volume YOY in 1Q16, with big data analytics leading the pack (+72% YOY). Internet of things (IoT), cybersecurity, health care information technology (HIT), cloud/SaaS, connected cars, and advertising and marketing also rose. HIT climbed above the pack in terms of average deal value on the strength of three deals above $1 billion and two that just missed that mark. Connected car technology debuts on our “bubble chart” at 16 deals in 1Q16, compared with 6 in 1Q15. Buyers included several globally recognized auto industry manufacturers. Four trends saw aggregate value growth rise (big data analytics, payments and financial services, HIT, advertising and marketing), while six fell (cloud/SaaS, smart mobility, cybersecurity, IoT, gaming and connected cars).


Tech dealmakers seek disruptive technologies, consolidation and better-than-organic growth

Although our global technology M&A transaction scorecard shows falling values across the board, 1Q16 nonetheless managed to place as the ninth-highest-value quarter ever. The falloff is due to challenging comparisons: 1Q15 was the highest-value first quarter ever, and 4Q15 was second-highest of any quarter. This ongoing strength seen in tech M&A appeared to come from two different sources. Accelerating digital disruption continued to demand companies make strategic technology deals or risk falling behind in fiercely competitive tech markets. At the same time, many companies sought deals to enhance their slow organic growth, whether in maturing technology market segments or in regions experiencing falling macroeconomic growth.

Many US targets acquired by China in 1Q16 CB deals

After turning the tables on a two-year net selling trend to become a net buyer in 4Q15, the US once again found its companies’ major targets in 1Q16 CB dealmaking. US companies were targeted in 72 out of 204 CB deals in which the US was not a buyer. Disclosed value of US targets was $10.3 billion — or 46% of all CB aggregate value ($22.2 billion). The UK was the biggest buyer of US volume (19 deals), but China, which acquired 7 US targets, was biggest by value ($7 billion). That included one $6 billion deal that was the largest of 1Q16. Of note, China’s buyers acquired $8.9 billion of 1Q16 CB disclosed value, or 59% of their total $15.1 billion aggregate value for all deals.


Outlook | Digital disruption means ongoing M&A strength

While macroeconomic uncertainty may suppress deal valuations a bit in 2016, remember: massive digital transformation caused by disruptive cloud, mobile, social and big data analytics technologies is just beginning. Tech vendors must continue seeking scale and end-to-end solutions. Some will continue going private to manage their transformations away from public-market scrutiny. Non-tech companies will increasingly acquire tech, driving up cross-industry blur — and all will pursue security technologies. To help assess your dealmaking opportunities, we suggest technology executives test their organizations against these questions:

  • Are we positioned to offer customers true solutions, or even answers, as opposed to just a point offering in the overall technology stack?
  • Is there a “hidden gem" among our business units and other departments with the potential to drive greater value?
  • Has disruptive technology placed our organization in the crosshairs of some upstart companies or activist investors?
  • Are we doing all we can to provide comprehensive security in our offerings?

“Digital disruption is not standing still for global economic uncertainty, so neither is global technology M&A. Big data analytics is a perfect example. Expect that wave to continue, as tech and non-tech companies alike seek data troves to feed their analytics, especially where machine-learning technologies are involved.”

Jeff Liu, EYJeff Liu
Global Technology Industry Leader
Transaction Advisory Services
EY

Note: all dollar references are in US dollars unless otherwise indicated.


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