Fear of bubble rises as tech firms go into acquisitions overdrive

Los Angeles: The US technology mergers and acquisitions market has shown a remarkable rebound since the beginning of the year. With strong demand for technology initial public offerings, some commentators are already talking of a bubble.

During the first five months of the year, dealmakers announced 851 transactions with US technology companies as the target, together valued at $54.7 billion (Dh200.74 billion), according to Dealogic, the data provider. Another 108 deals targeting US-based telecoms companies totalled $60 billion.

M&A spending in the US technology sector is running at its fastest pace for four years. In the same period last year, deals targeting technology companies in the country came to $32.6 billion, with telecoms companies adding $27.9 billion.

In part, the figures reflect the return of the "big deal". For example, Microsoft committed to pay $8.5 billion last month for Skype, the internet telephone company. In the US telecom sector, AT&T's proposed $39 billion bid for Deutsche Telekom's T-Mobile USA unit — the biggest telecoms deal since 2006 — was announced in March and is now subject to scrutiny by regulators. There have also been 21 other deals in the telecoms and technology sectors valued at more than $1 billion so far this year.

Mid-market participants

However, as the number of deals of less than $1 billion tracked by Dealogic in the first five months of this year indicates, the rebound in M&A activity is broad-based and includes a growing number of mid-market participants. There were 548 transactions of less than $1 billion involving a technology company as the target, acquirer or divestor (a technology company was the target in 462), according to Dealogic.

Among the more interesting deals, SuccessFactors, the human resources software group, agreed to pay $290 million for privately owned Plateau Systems, a provider of web-based software tools for business. The technology practice of Ernst & Young, the professional services group, attributes the upturn to the increasing interest in cloud computing (the use of technology to access remote computing power and data over the internet), software as a service (SaaS), social networking, mobile communications and information security. E&Y's quarterly global technology M&A update for the first quarter of 2011 noted that these factors encouraged companies to conduct "a larger number of smaller, strategically focused deals in the first quarter, continuing a trend that began last year".

"These trends speak to the rapid pace of change driven by the cloud, social networking and smart mobility, and the ways in which technology is becoming an increasing part of everyday life — not just something we do while at work," says Joe Steger, global technology transaction advisory services leader at E&Y. "On the business side, the trends reflect that information is becoming a larger component of the value of all products and services," he adds. Indeed, E&Y estimates that non-technology companies accounted for 15 per cent of the quarter's total value in disclosed-value deals, demonstrating that IT is blurring into other industries.

In the US, as elsewhere, companies continued to make multiple small acquisitions to address strategic business initiatives.

"This was evident, for example, among internet companies, which acquired multiple social-networking companies, and among established software and SaaS companies, which bought multiple SaaS companies," says Steger.

Further examples of this pattern were software and SaaS providers purchasing social networking companies to add social functions to enterprise applications or advertising/marketing platforms.

Competitiveness

Salesforce.com, the web-based customer management software provider and a SaaS pioneer, announced in March that it would pay $326 million for Radian6, a Canadian social media monitoring company, having recently completed its $31 million purchase of Dimdim, a web-conferencing start-up.

"Overall, this pattern enables buyers to maintain their competitiveness or extend their strategies in the face of rapid technology innovation, while capitalising on current and evolving trends," says Steger. "However, given the rapid pace and competitive nature of these deals, it still demands rigorous deal valuation, structuring, due diligence and integration."

Cloud computing was the driver behind dozens of deals, including several of the largest. Telephone and cable network operators acquired services companies with large data centres to build up their ability to provide these services. Among the most significant, Verizon Communications paid $1.4 billion for Terremark Worldwide and Time Warner Cable paid $230 million for NaviSite.

In addition, two deals involving acquisitions of storage systems suitable for use in cloud-computing data centres made the list of the quarter's Top Ten deals by dollar value. Many smaller cloud deals involved adding cloud-based functions to existing applications or services. Among technology companies targeting the expanding market for "big data" analytics, Hewlett-Packard agreed to pay about $275 million for Vertica Systems in February and Teradata acquired Aster Data Systems for $295 million in March. Those deals came nine months after EMC, the storage market leader, paid an estimated $400 million for Greenplum. EMC has also boosted its security management capabilities by buying NetWitness in a deal believed to be worth up to $500 million.

— Financial Times