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TMCNet:  Ernst & Young Releases Global Technology M&A Update: July-September 2012 Report

[November 15, 2012]

Ernst & Young Releases Global Technology M&A Update: July-September 2012 Report

Nov 15, 2012 (Close-Up Media via COMTEX) -- The aggregate value of technology mergers & acquisitions (M&A) fell 52 percent year-on-year (YOY) and 15 percent compared with the previous quarter to US$28.2b in the third quarter of 2012, according to Ernst & Young's Global technology M&A update: July-September 2012 report.

The company noted that large M&A transactions gave way to smaller, more strategic deals, as companies proceeded cautiously in light of continued, widespread macroeconomic uncertainty. In particular, the total volume of announced deals in 3Q12 was 752, up 2 percent YOY and 3 percent sequentially (on 2Q12). Strategic transactions continue to be driven by five long-term megatrends that are generating disruptive innovation in technology and leading to technology-enabled innovation in other industries. These megatrends are smart mobility, cloud computing, social networking, big data analytics and a growing sense of blur and convergence as technology sectors come together and the technology industry enters other industries as enabling innovation.

Notably, corporate and private equity (PE) deal volume moved in opposite directions: corporate was up 4 percent both YOY and sequentially to 701 deals in 3Q12, while PE declined 22 percent YOY and 2 percent sequentially to 51 deals in 3Q12.

The study also found that the volume and value of cloud/software as a service (SaaS) deals remained significantly higher than any other deal driver in the third quarter. Mobile/e-payment technologies surged in value during 3Q12, and deal value surged again for health care information technology (HIT) after falling in 2Q12. Social networking deals fell in value, but held steady in volume.

Joe Steger, Global Technology Industry, Transaction Advisory Services Leader at Ernst & Young, says "Once again, the macroeconomic environment is challenging technology M&A. But unlike after the global downturn that began in late 2007, when deal values and volume both fell hard and fast, volume continues to grow — at least a little." "This is a real testament to the spreading strength of the 'social-mobile-cloud' and big data analytics megatrends. These are major forces and they are still driving technology company transactions. So, we'll continue to see many smaller strategic technology deals, and caution around executing large transformative deals until macroeconomic conditions and confidence improve. But the long-term outlook for global technology M&A remains strong." Large infrastructure deals give way to more nuanced strategic plays Ernst & Young reported that sub-trends are gaining traction as data center performance, mobile/e-payments and HIT, along with the five megatrends, continued to drive strategic deals in 3Q12. For example, deals related to the rapid evolution of data center technology - necessary to meet the demands of cloud computing, smart mobility and big data analytics - surged ahead, in spite of broader macroeconomic challenges. And while the value of social networking and patent deals declined from 2Q12, buyers continued to target technologies that add social functions to enterprise software and intellectual property (IP) associated with the five megatrends. There was a variety of interesting deals blurring across the communications equipment (CE), computers, peripherals and electronics (CPE), semiconductor, and software sectors that all share one thing in common: technology for boosting performance in data centers.

Cross-border deal value declines, repeating 2011 pattern Cross-border (CB) deal value fell 40 percent sequentially in 3Q12 to US$10.5b, after surging 58 percent sequentially to US$17.4b in 2Q12. CB volume was also down, though only by one deal YOY and 2 percent sequentially. This mirrors a pattern in 2011, when macroeconomic uncertainty appeared to dampen CB deals more than in-border (IB) in the second half of the year despite a CB volume and value spike in the first half.

Regional snapshot: US acquired value grows; Brazil enters 'Top 10' According to the report, Americas' deal-makers captured a sequentially smaller share of global deal volume for the second consecutive quarter but a significantly larger share of global value. Key 3Q12 deal drivers included cloud/SaaS, smart mobility, social networking and big data, as well as health care and payments technologies — and nearly US$1b in disclosed-value distributor deals. In aggregate, the US captured 9 of the top 10 global technology deals (based on disclosed value) of the quarter the tenth went to Brazil.

Looking ahead: M&A valuations expected to decline, but turnaround is possible Data from Ernst & Young's biannual Capital Confidence Barometer Technology Industry, a recent survey of 1,500 global executives (including 154 technology executives) on M&A sentiment, indicates that technology executives' confidence in the global economy is weakening.

Technology respondents say there is a widening gap between buyers and sellers in terms of M&A valuations. Forty-five percent of technology company respondents to the survey expect M&A valuations to decline over the next 12 months compared with 21 percent in the April 2012 survey. In April, 40 percent said valuations would increase but only 28 percent believed so in October. And overall, in terms of economic confidence, the technology view is more pessimistic than that of all-industry respondents.

This said, there are a number of factors that could spark a turnaround in the technology M&A landscape. For example, cloud/SaaS deals were strong in 3Q12 and could fuel additional M&A; PE firms still have "dry powder" - unused funds that they have to invest soon or potentially give back to their investors; and smart mobile device makers now range from disruptive leaders to weakening providers in search of turnarounds — and many in between looking for a lever to success.

"While most of the ingredients necessary for a deal recovery remain in place plentiful cash reserves, adequate credit availability and transformative technologies one element remains elusive: economic confidence. Without it, the M&A market will continue to be constrained by conservatism. This is especially true for larger deals," concludes Steger.

Ernst & Young is a global provider of assurance, tax, transaction and advisory services.

More Information: ey.com ((Comments on this story may be sent to newsdesk@closeupmedia.com))

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