M&A report: 3Q16
Digital transformation spurs value records
Ongoing tech company transformations, rising private equity and cross-industry blur drove second consecutive quarterly record for big-ticket deals.
Digital transformation marches on. Tech and non-tech companies alike are being disrupted by innovative digital technologies and are turning to M&A in search of solutions. That fueled another blockbuster quarter for global technology M&A during 3Q16. Meanwhile, private equity (PE) buyers set new quarterly volume and value records of their own. Last quarter’s new record for the most tech deals at or above $1 billion was surpassed in 3Q16, and a new quarterly record also was set for cross-border (CB) disclosed value.
Volume: At 911 deals, 3Q16 volume fell 12% sequentially and 15% year-over-year (YOY). Low 3Q16 volume caused year-to-date (YTD) 2016 to fall from 2% ahead (at the end of 2Q16) to 4% behind 2015’s post-dotcom-record pace (2,952 versus 3,064 deals).
Value: With US$155.5 billion in disclosed value, 3Q16 became the third-highest aggregate value quarter on record, pushing 2Q16 to fourth. It was up 22% sequentially and 138% YOY (over US$65.4 billion in 3Q15). The only quarters with higher values are 4Q15 (US$189.8 billion) and 1Q00 (US$228.4 billion).
Big-ticket deals: 3Q16 had 32 deals at or above US$1 billion, 4 more than 2Q16’s prior record of 28 deals. Four of those deals exceeded $5 billion, including two that crossed the megadeal line to US$14.9 billion and US$32.4 billion.
PE buyers: PE tech dealmakers drove a second consecutive record high for aggregate quarterly disclosed value: US$36.1 billion. It was 40% above 2Q16’s prior record. Likewise, PE volume set a new quarterly record of 100 deals, 1 more than the 99 deals in 3Q10.
Blur: Non-tech-buyer disclosed value soared, more than tripling YOY to US$55.2 billion — a number that eclipses 2015’s full-year total of US$53.6 billion. At US$93.2 billion YTD, non-tech buyers are 74% ahead of full-year 2015 and have a 27% share of 2016 aggregate global technology M&A value. Though non-tech-buyer volume fell 11% YOY to 135 deals in 3Q16, the YTD total of 441 deals remains 13% ahead of YTD 2015.
China: At US$14.6 billion in 3Q16 disclosed value, China’s tech dealmakers were down 55% from 2Q16’s record but remained high above their historical value and volume levels for the fourth consecutive quarter. Volume was 40 deals, down from 53 in 2Q16 but almost double 3Q15’s 21 deals.
Hidden gems: Fewer companies divested potential hidden gems in 3Q16 but disclosed value more than doubled to US$39.4 billion (from US$16.7 billion in both 1Q16 and 2Q16). Ten deals exceeded US$1 billion, including one above $5 billion. Divestiture volume was about 130 deals, down both sequentially and YOY.
Cross-border (CB) deals: At $80.8 billion, 3Q16 established a new quarterly record for CB disclosed value, rising 85% higher than the prior record ($43.6 billion set in 2Q15).
Security, internet of things (IoT), smart mobility, and advertising and marketing lead 3Q16 value growth
Five deals above US$1 billion drove security to a sevenfold YOY increase in aggregate disclosed deal value for 3Q16, while IoT value nearly tripled YOY on the strength of four such deals — including the quarter’s top deal by dollar value, at US$32.4 billion. Deals targeting smart mobility and advertising and marketing technologies quadrupled YOY in disclosed value, rising 305% and 333%, respectively.
YTD, deals targeting nine of the disruptive digital technologies shown on the chart have increased in disclosed value over YTD 2015, ranging from +17% (health care information technology, or HIT) to +203% (gaming). Only payment and financial technologies fell.
In volume terms, only IoT, gaming and connected cars rose YOY in 3Q16; the remaining 7 of 10 are down.
Disruptive semiconductor, IoT, internet and software/SaaS technologies drive blockbuster M&A
While large incumbent tech companies pursuing transformations continued to drive big disclosed-value deals in 3Q16, non-tech companies pursuing transformations of their own were also buyers in some of the largest deals.
The largest 3Q16 deal, at US$32.4 billion, was by a non-tech company anticipating IoT growth: it involved a Japan-based multinational mobile telecommunications holding company planning to acquire a UK semiconductor company specializing in mobile processors.
Of note, semiconductor targets had more disclosed value than any other technology segment, posting US$54 billion in 3Q16, or 35% of the quarter’s aggregate value of US$155.5 billion. Software/SaaS is almost always the top target by volume and value, but in 3Q16, its US$46.2 (30%) billion was second. Semiconductor dealmaking is in its second year of very high-value deals driven by consolidation and IoT, totaling US$80.9 billion YTD in disclosed value — actually down 2% from US$82.3 billion YTD in 2015.
PE’s record-breaking US$36.1 billion in 3Q16 quarterly disclosed value came largely from buyers in the US (54%), China (19%) and Canada (12%). They bought mostly software/SaaS (36%) and internet (26%) targets.
Cross-border tech M&A sets new quarterly and full-year value records
Cross-border (CB) tech dealmaking would have set a new quarterly value record in 3Q16 even without the US$32.4 billion Japan-UK megadeal. That deal drove almost all of Japan’s 44% share of the record-shattering US$80.8 billion in 3Q16 disclosed value — and almost obscured the fact that CB deals targeting US companies peaked again in disclosed value during the quarter.
Of the quarter’s 15 CB deals at or above $1 billion, 9 of them targeted US companies. US targets accounted for:
- US$15.2 billion (82%) of the US$18.5 billion in CB disclosed value acquired by European companies
- US$4.1 billion (40%) of the US$10.2 billion acquired by Chinese companies
- 100% of the US$6.6 billion acquired by Canadian companies
- 97% of the US$2.3 billion acquired by Swedish companies
In all, US tech companies were targeted in CB deals with aggregate disclosed value of US$29.9 billion, 20% higher than the prior peak of US$24.9 billion in 3Q14.
Outlook | Digital disruption drives tech M&A strength despite market uncertainty
Rather than allowing geopolitical uncertainty and equity market volatility to slow dealmaking, global technology M&A buyers appear to be “rolling with the punches” in 2016. Technology is in such a state of rapid evolution, and tech and most other industries are so deep into disruptive digital technology transformations, that buyers know they can’t wait for markets to smooth themselves out. Instead, tech dealmakers — whether tech incumbents, non-tech buyers or PE — seem to be watching for the opportunities that market volatility sometimes creates, and are ready to make deals when it does. 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 of activist investors?
- Are we doing all we can to provide comprehensive security in our offerings?
“Surging private equity and non-tech buying of technology targets, combined with growing divestiture value, illustrates how technology companies are working to focus corporate strategy — and their portfolios — to keep pace with increasing digital transformation.”