Macroeconomic Uncertainty Catches Up with Technology Sector
Global technology mergers and acquisitions (M&A) deal value slowed to US$33.4b of aggregate deal value in the second quarter of 2012, down 43% year-over-year (YOY), according to Ernst & Young’s Global technology M&A update: April-June 2012.
Resurgent macroeconomic uncertainty worldwide caught up with the technology industry, which had outpaced deal value for all industries in the first quarter of 2012 but fell behind in the second quarter. Nevertheless, a steady volume of deals (728 in 2Q12 versus 729 in 2Q11) reflected the ongoing drive of five disruptive technology megatrends: smart mobility, cloud computing, social networking, big data and cross-industry blur.
Sequentially, 2Q12 aggregate deal value increased 33% from US$25.1b in 1Q12; however, as the report highlights the first quarter is historically the lowest-value quarter for technology deals. Cross-border (CB) technology deals showed a sharp increase in 2Q12.
CB aggregate deal value surged 58% sequentially to US$17.4b and represented 52% of all global disclosed value for the quarter (compared with 44% in both 1Q12 and 4Q11). Europe, Japan and Canada all saw substantial growth in CB transaction value, while US CB deal value declined 54% sequentially, to US$4.1b in 2Q12.
Joe Steger, Global Technology Industry Transaction Advisory Services Leader at Ernst & Young, says: “There were several surprises in the second quarter, with US buyers ‘sitting out’ a sequential increase in transaction value that was driven out of Europe, Canada and Japan. But despite macroeconomic uncertainty that just won’t go away, we continue to see spreading strength from the disruptive megatrends of ‘social mobile cloud’ and big data analytics, which drive strategic transactions and enable innovation throughout the global economy.”
Deals shed light on transformation
Many 2Q12 deals involved smart mobility cloud computing, software as a service (SaaS), social networking, big data analytics, and a growing sense of blur, with convergence of these technologies an increasing factor in global technology M&A.
Cross-sector and cross-industry deals underscored the way in which these five long-term megatrends are generating disruptive innovation in the technology sector while also leading to technology-enabled innovation in other industries.
The cloud/SaaS megatrend drove the highest volume and value of global technology transactions for the second consecutive quarter. There were four cloud-driven deals among the quarter’s top 10, including the purchase of a SaaS company that also hosts a web-based B2B business exchange, two deals in which companies outside of the technology sector are buying data centers to offer cloud services and a purchase of a cloud hardware and software company.
In addition, a handful of deals pointed to a blurring between cloud data centers and high-performance computing, typically the domain of research scientists and defense agencies.
Advertising and marketing technology targeted by diverse buyers
All five disruptive megatrends came together to drive dozens of advertising and marketing technology transactions in 2Q12, including several by the largest global advertising firms.
Big data analytics that understands customers’ and prospects’ social networking activity was key to many of these deals. Other targeted technologies included marketing automation, SaaS and tools for optimizing mobile and online campaigns.
The integration of social functions into enterprise software continued to grow in 2Q12 as a deal-driving trend, with a related transaction appearing for the first time among the quarterly top 10 deals. Patent-related deals involving diverse technologies topped US$2b, with social networking representing more than a quarter of the related disclosed value deals.
PE technology deal value declines
Despite a strong start in 1Q12 (when technology PE posted its highest first-quarter aggregate value since at least 2008), 2Q12 PE aggregate deal value declined 63% YOY and 22% sequentially to US$4.5b. At US$28.9b, corporate aggregate deal value was down 37% YOY but increased 50% sequentially.
The second quarter’s aggregate deal value YOY comparisons are with a 2Q11 that included many unusually large big-ticket deals, making for a tough comparison.
Cross-border deal flow shifts
In terms of disclosed deal value, 2Q12 was an up quarter for deal-making in Europe, the Middle East and Africa (EMEA), with an increase of 501% over the previous quarter to US$7.5b. Two pending big-ticket deals targeted US companies, reversing the 1Q12 deal value pattern of US buyers targeting European companies.
Overall, though, Europe’s deal flow reflects its struggles to emerge from economic malaise. The volume of acquisitions by EMEA buyers in 2Q12 declined 11% sequentially and 15% YOY to 139 deals, which represents 19% of global deal volume.
In the Americas, Canadian buyers captured an uncharacteristically high 23% of the 2Q12 deal value transacted across borders, including two of the quarter’s top 10 deals. Deal volume jumped higher sequentially and YOY in the Asia-Pacific and Japan (APJ) region. Video games, including online, mobile and social games, were the single greatest driver of APJ deal value, but many small strategic deals focused on geographic expansion or technologies such as mobile audio and video streaming and flash memory acceleration.
Strategic deal-making will continue, despite economic headwinds
“Disruptive technology megatrends continue to fuel strategic deal-making around the world, in spite of a difficult economic context,” says Steger.
“In the second quarter, we even saw new sub-trends emerge to drive deals, such as alternative input technologies like speech and handwriting recognition, in addition to the ‘social-mobile-cloud’ and big data analytics deal drivers. While the current macroeconomic challenges may dampen the appetite for large, transformative deals in the near term, expect to continue to see smaller, strategic deals — especially in the technology megatrends.”
“The long-term outlook for global technology M&A remains strong,” Steger concludes.