Technology M&A: January–March 2017 first look
AI drives first quarter value
Despite the downward-facing red arrows of our quarterly transaction scorecard, 1Q17 posted as strong a start for 2017 as the year-ago first quarter did for 2016 — a year that went on to set a new all-time global technology M&A value record. That equivalence was achieved despite a steep decline in disclosed deal value from China’s buyers, as US buyers more than made up the difference. Overall, dealmaking was driven by tech and non-tech companies alike facing disruption from innovative digital technologies and turning to M&A in search of solutions, and by continued strong activity from private equity (PE) buyers. Artificial intelligence (AI) drove the year’s first megadeal above $10 billion.
While some signs point to moderating tech M&A during 2017, the digital transformation caused by disruptive cloud, mobile, social and big data analytics technologies that is behind tech dealmaking is still young. As 2016 progressed, second-order effects such as potential business model change emerging from digital transformation became clearer: key related technologies such as the Internet of Things (IoT) and connected cars posted their highest quarterly values yet in 4Q16, a related semiconductor deal almost reached $40 billion and deals targeting cloud data center technologies helped IT services to its highest-value quarter of the year.
Volume: Nine hundred nine 1Q17 deals halted a two-quarter slide. Volume was up 8% sequentially over 4Q16 but still down 9% year-over-year (YOY).
Value: $66.1 billion in 1Q17 disclosed value plummeted 44% from the prior quarter but was down only 1% YOY from $66.7 billion in 1Q16. Of note, three of the past four first quarters posted between $66 billion and $67 billion in disclosed value (1Q15 was the outlier at $77.1 billion).
Big-ticket deals: Only 12 1Q17 deals rose to $1 billion or above, the lowest quarterly total in more than two years — since 9 in 4Q14. There were 14 and 15, respectively, in 1Q16 and 1Q15.
PE buyers: PE tech dealmakers set a new quarterly volume record of 105 deals in 1Q17 and nearly doubled their disclosed value YOY to $14.6 billion.
Blur: Even though volume and value were down YOY, non-tech buyers maintained the same 15% share of quarterly volume in 1Q17 that they averaged throughout 2016.
China: The Asia-Pacific and Japan (APJ) region followed China’s lead, with disclosed value for both falling YOY by 71% and 62%, respectively, to $8.4 billion and $5.7 billion.
Hidden gems: Divestitures of potential hidden gems rose to roughly 130 deals in 1Q17, following a two-quarter slide to about 105 deals in 4Q16. Disclosed value of divestitures rose slightly, to $11.1 billion from $10.7 billion in 4Q16, but remained below the 2016 quarterly average of about $20.9 billion.
Cross-border (CB) deals: At $35.5 billion, CB disclosed value was more than half (54%) of total quarterly value, well above the 45% share CB had of full-year 2016 value.
Artificial intelligence, Internet of Things, big data, and payment and financial services lead 1Q17 deal drivers
AI and machine learning debuted on this chart for the first time. One $15.3 billion deal targeted AI technology for autonomous driving systems that include Internet of Things (IoT) components, and therefore affected the top three “bubbles” shown.
And AI deal volume is accelerating: while AI-targeted deals increased slowly in volume throughout 2016, the 34 deals we counted in 1Q17 are already nearly half the approximately 70 we saw for all of 2016.
Besides AI, also bucking the overall YOY decline with rising volume in 1Q17 were deals targeting big data, IoT, and payments and financial services technologies. The other six deal-driving targets shown declined in volume; some, such as security, fell only slightly, and others, including health care information technology (HIT) by much more. However, four increased YOY in terms of aggregate disclosed value: cloud/SaaS, payments and financial services, IoT and connected cars.
PE buyers help keep 1Q17 flat YOY with strong volume and value growth
Despite the prevalence of downward-facing red arrows in this quarter’s transaction scorecard, it represents a relatively strong start to the year — for example, roughly on par with 1Q16 (only 1% down) in the all-important aggregate disclosed value metric.
Volume and value growth came mostly from PE buyers, who nearly doubled their disclosed value YOY to $14.6 billion from $7.5 billion in 1Q16. That 1Q17 value would have been considered the top end of the typical PE range a year ago, but it is significantly lower than the last three quarters (which ranged from $20.8 billion to a record $36.1 billion). Still, PE is off to another strong start to the year: their volume of 105 deals is a 14% YOY increase.
Incumbent tech companies pursuing transformation acquired half the dozen 1Q17 deals of $1 billion or more, including two of the quarter’s largest deals by dollar value. Overall, tech companies acquired $42.6 billion in 1Q17, only a fraction more than $42.5 billion in 1Q16. In terms of volume, tech companies fell 12% to 671 deals from 763 deals in the year-ago quarter.
Non-tech buyers fell 46% YOY in disclosed value to $8.9 billion. At 133 deals, non-tech-buyer volume was down 10% from 1Q16.
US buyers drive cross-border tech M&A for second consecutive quarter
Perhaps you can credit it to the US dollar’s growing strength: US buyers acquired 76% of the disclosed value for deals occurring across borders in 1Q17, after accounting for 64% in 4Q16. Overall disclosed value for CB deals declined 48% sequentially to $35.5 billion, while US CB value declined only 38% to $26.8 billion. It was up 60% YOY from $22.2 billion in 1Q16.
- Fifty-seven percent of the US value came in one $15.3 billion megadeal targeting an Israeli AI and connected car tech company. In all, US buyers acquired 142 (40%) of the quarter’s 351 CB deals.
- US buyers acquired 77% ($8.5 billion) of CB value sold by European companies.
- US companies also were CB targets in 88 deals with aggregate disclosed value of $5 billion — half of which were acquired by Canadian buyers.
- Despite their overall 24% YOY volume decline, APJ buyers’ CB deals fell by only 9% (4 deals) to 42. But disclosed value of APJ buyers’ CB deals fell to $3.1 billion from $13.9 billion in 1Q16 (-78%).
Outlook | A new wave of AI-driven digital disruption may form to boost tech M&A growth
Sequential 1Q17 volume growth after two quarterly declines is an important upside indicator for global technology M&A. Then there’s artificial intelligence: AI deal growth could emerge as a key value driver, especially considering that the technology went from having no deal ever top the $1 billion level straight to a $15.3 billion megadeal. Perhaps most importantly, though, technology continues its rapid evolution, and all industries are experiencing profound disruptive digital technology transformations. Tech dealmakers — whether tech incumbents, non-tech buyers or PE — must be ready to make deals when opportunities arise. 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?
“The speed of technological advancement continues to change the nature of tech-deal making. Not only has it changed the type of deals we’re seeing in the market — it is changing the way companies diligence, value and integrate targets.”
Note: all dollar references are in US dollars, unless otherwise stated.