Deal Activity Overview

By Joe Steger  |  Posted 2010-05-21 Print this article Print

Global M&A activity reveals three big trends at work.

Worldwide M&A activity indicates an ongoing recovery of the global economy and the growing cash and investment positions of leading technology companies. These factors cement our belief in increased M&A activity, especially the significant increase in cash and investments of leading technology companies.

The top 25 technology companies by market capitalization (excluding those not required to report quarterly financials) have increased their cash, short-term and long-term investments by an astounding 33% in the last year, to $350 billion. That’s an average of $14 billion per company or, looked at another way it’s an average of $24.6 billion each for the top 10 companies and $7 billion each for the next 15. This is quite impressive given the worst economic downturn in many years. 

Those companies’ need to put that cash to work for shareholders, combined with the advent of the three megatrends, point to not only increased M&A but also a future of continued innovation and excitement from the technology industry. 

In addition, steadily increasing technology deal numbers reflect the accelerating speed with which certain technologies are changing, thus continuing to push established companies to acquire innovative start-ups. Ernst & Young’s Global technology M&A update, January-March 2010 shows 628 transactions announced in the first quarter of 2010, up 14% from the fourth quarter of 2009 and up 55% from the first quarter of 2009, which was the bottom of M&A activity in the recent downturn. 

Deal values, however, fell sequentially in the first quarter 2010 (although they increased from that bottom represented by the first quarter of 2009). Smaller deals were the norm in the first quarter, particularly small strategic deals. For example, we saw a search company buy a “social search” start-up, a networking company buy a “smart” energy software provider, and five established companies acquire smaller players to position themselves within the cloud computing/Software-as-a-Service (SaaS) market or to enhance existing cloud/SaaS offerings.

In all, total value of all first-quarter 2010 transactions in which the deal value was disclosed fell 66% from the fourth quarter of 2009 (to $12.1 billion) and the average value per disclosed-value deal fell 56% (to $68 million). There were just two deals above $1 billion, compared with seven in each of the two previous quarters.

One of several factors we believe contributed to the lack of big-ticket deals in the first quarter is that some of the companies that announced large acquisitions in the second half of last year appear to be taking a pause to focus on successfully integrating their new acquisitions. Other likely factors include seasonality — fourth-to-first-quarter values dropped in 8 of the last 10 years — and uncertainty based on fluctuations in the NASDAQ composite index, which dropped for the first five weeks of 2010 before recovering. We have observed a 15-year-long correlation between the NASDAQ and technology industry M&A deal activity and average values.

Joe Steger is Global and Americas Transaction Advisory Services Leader, Technology, for Ernst & Young LLP.  The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.


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