| Second-quarter M&A Report
Tech M&A rebounds as markets rally
Analyst: Brenon Daly
Date: 18 Jun 2009
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From essentially a standing start, second-quarter tech M&A has jumped back to its highest level in a year. With two weeks still remaining in the quarter, the aggregate value of announced transactions has hit $43bn. While that's a far cry from the second quarter of 2008, the spending so far this quarter represents a five-fold increase over the first three months of 2009. Indeed, that seems to be the case whether we look at deal volume or deal valuations: M&A isn't anywhere close to where it once was, but it is rebounding in that direction.
Quarter-by-quarter M&A totals
| Period | Deal volume | Deal value | | Q2 2009 | 642 | $43bn | | Q1 2009 | 646 | $9bn | | Q4 2008 | 723 | $40bn | | Q3 2008 | 737 | $32bn | | Q2 2008 | 721 | $173bn | | Q1 2008 | 836 | $55bn |
| Source: The 451 M&A KnowledgeBase
If anything, the rebound should accelerate through the rest of the year. At least that's the projection from our recent survey of corporate development executives at more than 60 technology firms. The seven-question survey, which closed June 15, updated our full report from last December. (The view from corporate dealmakers is significant because, collectively, they set the tone in the tech M&A market. So far this year, strategic buyers have accounted for almost $50bn of the more than $52bn in announced deal values, with financial acquirers tallying just $3bn.)
Projected M&A activity by corporate development executives
| Period | Increase | Stay the same | Decrease | | June 2009 | 61% | 29% | 10% | | December 2008 | 44% | 32% | 24% |
| Source: The 451 Group Tech Corporate Development Outlook Survey
If not bullish, the projections in our midyear survey are much less bearish than they were in our previous survey last December. Six out of 10 respondents said their companies will accelerate their rate of shopping, while just one out of 10 projected their M&A pace will tail off for the rest of 2009. That's a notable swing back to optimism from the previous survey, when just four out of 10 said they expected to be busier, and two out of 10 said they would slow their acquisition pace. (In addition, we would note that there are several key technology buyers, which typically ink a deal every month or two, that have yet to be heard from in 2009, including Google (Nasdaq: GOOG), Hewlett-Packard (NYSE: HPQ) and Citrix (Nasdaq: CTXS).)
So far this quarter, tech acquirers have announced some 640 transactions, with a total tab of $43bn. That compares to around 720 deals valued at a stunning $173bn during the second quarter of 2008, which has turned out to be the recent high-water mark for tech M&A. In the two quarters immediately following the record Q2 2008, as the Wall Street crisis decimated our financial services industry and knocked our country into its sharpest post-World War II recession, deal spending was measured in the tens of billions of dollars. The aggregate value of tech transactions in Q3 2008 slumped to just $32bn, followed by a mere $40bn in the final quarter of last year.
Deal flow dried up even more in the first quarter of 2009, as tech companies struggled to understand how the recession would play out. Amid the almost unprecedented economic upheaval, companies (understandably) opted not to heap on additional uncertainty by buying other businesses. That was particularly true with large deals, which carry more risk than small ones. As we noted in our first-quarter report, for the first time in the seven years that we've kept records on technology M&A, acquirers didn't announce a single purchase worth more than $1bn during the quarter.
Heading into the second quarter, there was a sizable backlog of all-but-closed deals. As the equity markets began a stunning rally in early March that has seen the Nasdaq jump 40% off its lows, confidence returned to many buyers. That helped break through much of what had jammed up deals in early 2009, and the second quarter opened with a flurry of transactions. In fact, April saw the highest value of announced deals in any single month since June 2008; tech shoppers spent substantially more in April ($21bn) than they had in the previous four months combined (December to March totaled just $16bn).
Big-ticket buys
| Year | Number of $1bn+ transactions | | 2009, 1H | 8 | | 2008 | 33 | | 2007 | 79 | | 2006 | 74 | | 2005 | 71 | | 2004 | 28 | | 2003 | 14 | | 2002 | 12 |
| Source: The 451 M&A KnowledgeBase
That confidence has extended to even the big-ticket purchases, which companies typically put off in the first quarter. We've already had eight deals valued at more than $1bn announced in the second quarter, which essentially puts the quarter on pace to match the rate of 10-digit deals in 2008. However, we would add that it's just half the rate of 2006 or 2007, when we typically saw 15-20 billion-dollar transactions each quarter.
Not only has M&A activity increased in recent months, but valuations have inched up, as well. In the current quarter, the median price to trailing 12-month (TTM) sales multiple has risen to 1.2x, after bottoming out at 0.9x TTM sales in the first quarter. (That means, for instance, that a company with $10m in revenue that sold for just $9m in the first three months of the year now gets $12m in a sale.) Obviously, a large portion of that can be attributed to the recovery in the equity markets. Although we would quickly add that many of the public targets taken off the board so far this year have been pretty broken businesses, including Sun Microsystems (Nasdaq: JAVA), Borland (Nasdaq: BORL), InFocus (Nasdaq: INFS), SGI (Nasdaq: SGIC) and others.
Rebounding multiples
| Period | Median valuation | | 2Q 2009 | 1.2x TTM sales | | 1Q 2009 | 0.9x TTM sales | | 2Q 2008 | 1.7x TTM sales | | 1Q 2008 | 1.9x TTM sales |
| Source: The 451 M&A KnowledgeBase
Those buys have all been done at less than 0.5x TTM sales, which has put pressure on the overall acquisition valuation of public companies. So far this year, the average public company has sold for just 0.9x TTM sales, down from 1.4x TTM sales in 2008 and 2.2x TTM sales in 2007. Of course there have been a few premium transactions, most notably the ongoing acquisition tug of war over Data Domain (Nasdaq: DDUP). On an enterprise value basis, NetApp's (Nasdaq: NTAP) current bid values Data Domain at 6.5x TTM sales.
In terms of private firms, respondents to our corporate development survey appear to see a floor being put on their valuations. In the June survey, roughly one-third said valuations of private technology vendors would fall further in the second half of 2009, with another one-third saying they would hold steady, and another one-third predicting they would rebound before the end of the year.
Projected change in private company valuations
| Period | Increase | Stay the same | Decrease | | June 2009 | 30% | 36% | 34% | | December 2008 | 4% | 9% | 87% | | December 2007 | 39% | 28% | 33% |
| Source: The 451 Group Tech Corporate Development Outlook Survey
That roughly matches the outlook they gave in our December 2007 survey, and stands in sharp contrast to the valuation expectations of just a half-year ago. At the end of last year, some 87% predicted that valuations for startups would decline in the coming year. (Granted, that's a qualitative assessment that doesn't take into account the base valuation now compared to late last year.) But it's still noteworthy that the would-be buyers of private technology firms are no longer predicting marked-down sales. Also, in the same survey, a majority of those acquirers said they planned to be more active in M&A, even if it ends up costing them more.
Perhaps the most remarkable development in deal flow so far this year has been the dramatic rise in the number of asset sales. These transactions – whether wind-downs in a venture portfolio or a corporate divestiture – currently represent twice as large a share of overall deals than they have at any point over the past three years. In fact, the only time the level has been close to the current rate is in 2002, when the economy was also emerging from a Bubble-induced recession.
Asset acquisitions as percent of overall tech M&A activity
| Period | % of deal value | % of deal volume | | 2009 YTD | 24% | 33% | | 2008 | 9% | 16% | | 2007 | 4% | 14% | | 2006 | 8% | 13% | | 2005 | 13% | 19% | | 2004 | 14% | 20% | | 2003 | 8% | 22% | | 2002 | 26% | 26% |
| Source: The 451 M&A KnowledgeBase
Obviously, when times get tight, companies refocus on their core operations, trimming the less-profitable businesses they got into through M&A or organic expansion. And indeed, already this year we've seen divestitures by Verisign (Nasdaq: VRSN), Compuware (Nasdaq: CPWR), Motorola (NYSE: MOT), eBay (Nasdaq: EBAY), Autodesk (Nasdaq: ADSK) and others. That's not at all surprising, given the economic environment. In fact, in last December's survey, the number of corporate development executives who said they expected divestitures to increase was twice as large as those who said divestitures would decrease in 2009.
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This report falls under the following categories. Click on a link below to find similar documents.
Other Companies: Autodesk, Borland Software, Citrix Systems, Compuware, Data Domain, Digital Equipment Corp, eBay, Google, Hewlett-Packard, InFocus, Motorola, NetApp, Silicon Graphics International, Silicon Graphics International, Sun Microsystems, VeriSign,
Analyst: Brenon Daly
Sector:
Technology portfolio investors / Investment bank
Technology portfolio investors / Venture capital
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