Mergers and acquisitions (M&A), joint ventures and alliances are linked to overarching industry dynamics.
Recent transaction activity — fueled by the drive to gain competitive advantage and abundant available cash — demonstrates the rise of three interrelated megatrends:
- “Mobile everything” drove most of the technology deals for the last year, bringing computing and information management power on any device, anywhere, anytime.
- The “blurring of everything” refers to the globalization and convergence of technology industry sectors, of technology enabling other industries and of technology platforms (smartphones, netbooks, tablets and “pay as you go” internet-based cloud computing services).
- “Smart everything” refers to information gathered from smart stand-alone and embedded devices and information generated through social networks.
These megatrends are forcing technology companies to think strategically about M&A, joint ventures and alliances — translating into a holistic approach to transaction integration.
Leading technology companies are addressing integrations earlier than the historical norm — during target selection and throughout the entire acquisition process — and are thinking deeply about how the culture, products and services, sales and supply chain (virtual or physical) fit to enable the right integration.
This requires an integration strategy that achieves the optimal balance between scope (stand-alone or integrated), speed and operational model.
As technology companies seek to transform themselves and achieve growth through strategic transactions, prior “all or nothing” integration strategies are evolving to more complex, hybrid models.
New markets, unfamiliar rules
Technology as an enabler of innovation across industries has started to “blur into” those industries, often through transactions. Consequently, the key challenge of assessing a potential target’s risks and benefits is complicated by the unfamiliar territory of a new market.
Recent volatility in equity markets is reflected in fluctuating transaction valuations.
The total value of all disclosed value deals for the first quarter of 2010 fell 66% from the fourth quarter of 2009, and the average value per deal fell 56%.1 Yet both were up significantly compared to the prior-year period. This volatility makes valuing transactions difficult.
Transformative deals promise new revenue streams from unprecedented combinations of technology roadmaps, access to new markets and accelerated cost synergies. These dynamics represent further challenges to realizing transaction values.
The United States, United Kingdom and China have all announced reviews of their M&A guidelines in the last year. Given all the scrutiny to which large strategic deals are subjected, there is increasing risk to achieving goals. Even when a deal is approved, there is a risk of reduced deal value if the approval process drags on.
Transactions on the rise
Despite these risks, we expect global technology transaction activity to increase.
The top 25 technology companies by market capitalization have increased their cash, short-term and long-term investments by an astounding 33% in the last year, to US$350 billion.2
The need to put that cash to work for shareholders, combined with the rise of the three megatrends, points to increased transaction activity to grow revenue and achieve new levels of innovation.
1 Ernst & Young Global technology M&A update: January–March 2010.
2 “Ernst & Young analysis of Capital IQ data,” accessed 23 April 2010; market capitalization based on top 25 companies reporting quarterly financials.