Technology mergers and acquisitions are forecast to jump 40% next year, as private equity companies flush with cash increase their activities in the sector.
That increase would follow this year’s projected increase of 50%, says Eric Gebaide, a managing director at Innovation Advisors. The New York-based investment banking firm recently released a report saying that global technology M&As would rise to $248.4 billion this year, the highest since $490.3 billion in 2000.
In recent years, there has been a surge in the number of private equity firms, which seek to buy companies, improve their performance and then sell them at a profit. Hedge funds and venture capital firms have both gotten into private equity, bringing enormous resources and expertise to the area.
“I don’t think there’s a venture fellow I’ve spoken to in the last two years who isn’t also planning to do private equity,” Gebaide says. Besides the sheer dollars chasing deals, this year’s tech M&A boom has been propelled by a strong market for initial public offerings in India, which has provided an exit opportunity to private equity companies investing in that fast-growing country.
The market’s increasing acceptance of leverage has also been a factor. Many deals are being done with debt-to-cash-flow ratios that are about twice what they were a few years ago, as investors add risk to get higher returns, Gebaide points out.
Impact on Customers
There’s no single answer to the question of whether private equity acquisitions will benefit, or hinder, technology companies and their customers. Some private equity investors do buy companies with the goal of “shining them up for a flip,” Gebaide says. That’s almost never the case with a strategic buyer, the term used to describe an operating company that acquires another–for instance, Oracle buying PeopleSoft.
Still, in some cases private equity investors may take a long-term view not possible for public acquirers facing pressure to meet quarterly earnings targets. In those M&A events, the customer will end up “in the driver’s seat,” Gebaide says, since the buyer needs the customer “to not only stay in place but grow.”
Customers of SunGard, Intergraph Corp. and Open Solutions may soon have some specific insights into this; all three companies have been taken over by private equity groups in recent months. Stay tuned.
