| First-quarter M&A Report
M&A spending drops 85% amid recessionary doom and gloom
Analyst: Brenon Daly
Date: 2 Apr 2009
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With the economic recession deepening and equity markets plunging, the first quarter was hardly the time for a shopping trip. Many of the traditionally busiest tech buyers – both strategic and financial – sat out deal flow in the first three months of 2009. And nobody wanted to do a big deal: For the first time in the seven years we've kept records on technology M&A, buyers didn't announce a single transaction worth more than $1bn during the quarter.
Quarter-by-quarter M&A totals
| Period | Deal volume | Deal value | | Q1 2009 | 625 | $8bn | | Q4 2008 | 721 | $40.7bn | | Q3 2008 | 733 | $32.2bn | | Q2 2008 | 716 | $173.2bn | | Q1 2008 | 835 | $55.2bn |
| Source: The 451 M&A KnowledgeBase
Overall, deal flow plummeted to only 625 deals worth $8bn in the just-completed quarter, down from 835 deals worth $55.2bn in the first quarter of 2008. That's a decline of 85%, in terms of dollars spent. Annualized, first-quarter M&A spending puts 2009 on track for the lowest level of tech dealmaking in more than a decade. In fact, the annualized total of some $32bn would be just half the recent low-water mark, the $61bn recorded in 2003.
Granted, projecting from the numbers in a single quarter is hardly an accurate way to come up with an annual total. That's particularly true for a lumpy business like M&A. (Consider that on the first day of the second quarter, Fidelity National Information Services (Nasdaq: FNIS) spent some $2.9bn in equity on Metavante. Had that deal happened just one day earlier, it would have boosted total first-quarter M&A spending by more than one-third. And of course, there are still reports of a multibillion-dollar offer for Sun Microsystems (Nasdaq: JAVA) from IBM (NYSE: IBM) floating around out there.)
Nonetheless, 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. For the past four straight years, spending on tech deals has topped $300bn.
There are a number of reasons for the decline, but the overriding concern was the ongoing economic recession. As indicated by the dozens of companies that have scrapped their traditional practice of giving annual sales and profit guidance to Wall Street, there's a tremendous amount of uncertainty about the outlook for 2009. Given that, few companies were willing to introduce additional uncertainty in the form a significant acquisition.
Big-game hunting
| Year | Number of $1bn+ transactions | | 2009, Q1 | 0 | | 2008 | 34 | | 2007 | 79 | | 2006 | 74 | | 2005 | 71 | | 2004 | 28 | | 2003 | 14 | | 2002 | 12 |
| Source: The 451 M&A KnowledgeBase
To underscore that, consider that billion-dollar deals completely disappeared in the first quarter. (The largest single transaction in the quarter was Autonomy Corp's (LSE: AU.L) $775m purchase of Interwoven (Nasdaq: IWOV), although as noted above, the second quarter recorded a ten-digit deal on its first day.) Even in 2008, when the current recession first began to be felt, we still saw an average of about nine transactions valued at more than $1bn in each quarter. For comparison, there was an average of 18 or so per quarter during 2006-07.
The reluctance to shop was by no means limited to blockbuster deals. Overall, we tallied only 119 deals by NYSE- and Nasdaq-listed tech companies in the first three months of 2009, just half the number of purchases made by US public companies during the same period last year. The decline in M&A spending is even more dramatic: In the first three months of the year, US public companies announced a grand total of spending of just $3.2bn, which is less than one-tenth the level ($39.4bn) during the same period of 2008. Typically busy tech buyers such as Symantec (Nasdaq: SYMC), Citrix (Nasdaq: CTXS), Google (Nasdaq: GOOG) and Hewlett-Packard (NYSE: HPQ) sat out the first quarter altogether.
Contracting multiples
| Period | Median valuation | | Q1 2009 | 0.9x TTM sales | | Q1 2008 | 1.9x TTM sales |
| Source: The 451 M&A KnowledgeBase
And when first-quarter deals did get done, the valuations reflected the bear market. Overall, the median valuation for transactions sank to just 0.9x trailing 12-month (TTM) sales, less than half the 1.9x TTM sales in the first quarter of 2008. The drop-off in valuation held for even venture-backed startups, which typically enjoy a premium valuation and have been somewhat insulated from the overall market in the past. The median valuation for sales of VC-backed companies in the first quarter of 2009 slumped to 2.1x TTM sales, compared to 3.8x TTM sales during the same period last year.
We would attribute the decline in valuations of VC-backed companies to the fact that many venture capitalists looked to rid their portfolios of cash-burning startups. As the year grinds along and cash gets even tighter for these startups, we suspect the premium that has historically been paid for VC-backed companies will continue to be erased. Add to that, the public market remains closed for IPOs. For the second straight quarter, not a single venture-backed IT company went public.
Instead, we've seen a steady stream of wind-down sales, which have returned only a few cents of every dollar that VCs put into the startups. Consider the case of data auditing vendor Tizor Systems, which raised some $26m from a handful of venture firms in its seven-year history. The company – or rather, its assets – sold in late February to Netezza (NYSE: NZ) for just $3m.
Elsewhere, mValent sold to Oracle (Nasdaq: ORCL) for less than $10m, after raising $20m in three rounds. And Mazu Networks, which had pocketed nearly $50m in venture money, got picked up for just half that amount (excluding earn-outs) by Riverbed. In addition, SAP (NYSE: SAP), EMC (NYSE: EMC) and Quest Software (Nasdaq: QSFT) all snagged assets from companies in VCs' portfolios during the first quarter.
If tech companies were reluctant buyers in the first three months of the year, at least they were still at the table. The same can't be said for their cousins at buyout shops. Obviously, the continuing upheaval in the credit market kept nearly all of them from inking any deals.
Buyout activity
| Period | LBO spending | | Q1 2009 | $1.5bn | | Q1 2008 | $5.7bn | | Q1 2007 | $17.9bn | | Q1 2006 | $9.9bn | | Q1 2005 | $20.3bn | | Q1 2004 | $2.6bn | | Q1 2003 | $3.6bn | | Q1 2002 | $900m |
| Source: The 451 M&A KnowledgeBase
While many of the big names (including The Carlyle Group, Hellman & Friedman, Apax Partners, The Gores Group, Thoma Cressey Bravo, Francisco Partners and Vector Capital) were still active in 2008, not one of those frequent tech buyers has announced a single transaction so far this year. The result was the lowest first-quarter total spending by buyout firms since 2002, when most of Wall Street was convinced that technology companies were too cyclical to borrow against.
Nonetheless, there have been a few signs of a thaw in the credit market recently. In February, for instance, Cisco Systems (Nasdaq: CSCO) sold $4bn worth of debt. In addition, Autonomy was able to tap the credit market for $200m to help finance the purchase of Interwoven, its largest-ever acquisition. Autonomy used existing cash and an equity placement to cover about three-quarters of the $775m purchase price, with the newly created credit facility supplying the rest. (The deal, announced in mid-January, closed in just two months.)
In a sign of the tough times, the first quarter also saw the high-profile bankruptcy of Nortel Networks (NYSE: NT), as well as the first divestiture of what could be the sale of many divisions at the beaten-down telecom equipment provider. It's worth noting that one of the reasons Nortel filed for Chapter 11 protection is the series of ill-conceived and expensive acquisitions that the company did a decade ago. Nortel did its first bankruptcy-supervised unwinding of those deals during the first quarter, selling its application delivery business to Radware (Nasdaq: RDWR) for just $18m.
Nortel insists that it will emerge from Chapter 11 bankruptcy protection, but that would be a tough trick to pull off in any environment. (For the record, Nortel once sported a market capitalization of some $250bn.) Coming back from the dead in the midst of the worst economic recession since the Great Depression appears highly unlikely.
We could imagine a situation where several Nortel businesses are shed or shuttered, and the remaining core business is sold in a fire sale somewhere down the road. That's pretty much how it played out for Silicon Graphics (Nasdaq: SGIC), which went to Rackable Systems (Nasdaq: RACK) for just $25m on the first day of the second quarter as it went 'Chapter 22.' SGI never fully recovered from its first trip into Chapter 11 in 2006, and the bankruptcy court-supervised sale of the company marked the heartbreaking end to the former tech stalwart.
Search Criteria
This report falls under the following categories. Click on a link below to find similar documents.
Other Companies: Apax Partners, Autonomy Corp, The Carlyle Group, Cisco Systems, Citrix Systems, EMC Corp, Fidelity National Information Services, Francisco Partners, Google, Hellman & Friedman, Hewlett-Packard, IBM, Autonomy Interwoven, Mazu Networks, Metavante, mValent, Netezza, Nortel Networks, Oracle, Quest Software, Rackable Systems, Radware, Riverbed Technology, SAP, Silicon Graphics International, Sun Microsystems, Symantec Corporation, The Gores Group, Thoma Cressey Bravo, Tizor Systems, Vector Capital,
Analyst: Brenon Daly
Sector:
Technology portfolio investors / Investment bank
Technology portfolio investors / Venture capital
Technology portfolio investors / Private equity
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