Global technology M&A deal value surges in Q313

NEW YORK, USA: An unusual mix of deal drivers came together in the third quarter of 2013, spurring big-ticket deal-making and driving global technology M&A deal value to a post-dotcom-bubble record, according to EY's Global technology M&A update: July-September 2013.

Aggregate disclosed deal value of $71.2 billion represented an increase of 152 percent YOY and 113 percent sequentially quarter on quarter.

Cross-border deal volume and value reversed long-term declines as value in Q313 nearly quadrupled sequentially to $24.5 billion and volume increased 13% sequentially to 220 deals.

Private equity (PE) deal value was $11.2 billion in Q313, down 20 percent sequentially, but up 130 percent YOY and remaining near the top of its five-year range. PE volume (60 deals) increased for the third consecutive quarter, up 18 percent YOY and 5 percent, sequentially. Corporate aggregate deal value soared 157 percent YOY to $60 billion in Q313 - also a post-dotcom record - while corporate volume (644 deals) bounced back from a four-year low last quarter.

Mobility and cloud, two of the five technology megatrends (smart mobility, social networking, cloud computing, big data analytics and accelerated technology adaptation) that we've followed for several years, played key roles in the biggest value deals of Q313.

The Q313 M&A report found that while some deals envisioned accelerating growth in alignment with the five megatrends, others hoped to recapture growth that had been disrupted by them. In addition, confidence in the global economy rose to its highest level in two years, based on the results of the latest issue of EY's Capital Confidence Barometer - a report produced by EY on a semiannual basis.

Other contributing factors included continued favorable PE conditions, sector consolidation, rising information security concerns, increasing divestitures and accelerated technology adaptation in certain industries, particularly financial services, health care information technology (HIT) and advertising and marketing.

Joe Steger, EY's Global Technology Industry Transaction Advisory Services leader, says: "Deal-making confidence is returning to global technology M&A, as evidenced by the record value and renewed volume growth in the third quarter.

"The kinds of deals getting done in Q3 show just how rapidly the five transformative technology megatrends of mobile, social, cloud, big data analytics and accelerated technology adaptation are reshaping the technology landscape. And as returning confidence overcomes increased political instability, macroeconomic uncertainty and valuation gaps, we will continue to see steady growth in technology M&A volumes. According to the CCB, 65 percent of technology executives expect deal volumes to modestly improve over the next year."

The report identifies the following key trends and deal drivers:

Smart mobile disruption: Smart mobility made its presence felt more than usual in Q313, driving deals targeting strategic growth through mobile technology, as well as deals targeting established companies weakened by rapid smart mobile adoption.

Volume grows, but lags value: Deal volume increased sequentially in Q313 after experiencing three consecutive quarterly declines, but the growth was disappointing in comparison with aggregate value growth of 113 percent sequentially and 152 percent YOY. Q313 deal volume was 704 deals, up 12 percent sequentially, but down 6 percent YOY. Average quarterly deal volume for the last four quarters was just above 670, compared to almost 740 for the previous seven quarters, for a decline of nearly 10 percent.

PE deal-making remains high: At 60 deals and $11.2 billion in aggregate value, PE deal-making is close to the upper end of the range seen in the last five years - despite the fact that the Q313 value total is the lowest so far this year. Low interest rates, wide availability of credit, and opportunities created by the five megatrends (including companies weakened by the disruption) are all fueling this PE activity, and should continue to do so.

In reversal, cross-border activity climbs: Cross-border (CB) volume and average value both reversed long-term declines in Q313. In keeping with the overall volume and value trend, the CB value reversal was much bigger than that of volume. After four consecutive quarterly declines, CB volume increased 13 percent sequentially (slightly better than the 12 percent increase for all deals). CB average value, meanwhile, has declined relative to all-deal average value for seven consecutive quarters and was 43% below the all-deal level in Q213. But it reversed in Q313, tripling sequentially to $429 million, or 8 percent higher than the $398 million all-deal average.

Looking ahead

EY continues to expect moderate growth in technology deal volumes for the next few quarters. That means that the forces of disruptive innovation from the five megatrends (smart mobility, cloud computing, social networking, big data analytics and accelerated technology adaptation), plus technology executives' increasing confidence (68 percent of technology executives responding to the CCB think global economy is improving today), will overcome valuation disconnects and the growing belief by some large corporate buyers that they need to make fewer, but larger, deals to have a more meaningful impact on revenue and earnings growth.

Aggregate disclosed value, however, is more of a wild card. The need for companies to grow both at the top line and bottom line still persists, and companies at a crossroads are still out there. But we are unlikely to see so many taking action simultaneously again. Consequently, EY expects value to grow, but not from the Q313 record of $71.2 billion. Rather, value growth will pick up where it left off, growing modestly from the trailing 12-month average before Q313, which was $31.9 billion per quarter.

"As the five megatrends - especially smart mobility and cloud - continue to transform the technology industry landscape, deal-making by leading innovators and by ‘companies at a crossroads' will drive technology M&A volume up, even if volume for all industries continues to decline," concludes Steger.