Technology Mergers & Acquisitions Get Off to a Strong Start in the First Quarter of 2011

NEW YORK, May 11, 2011 /PRNewswire/ -- Driven by trends like cloud computing, software as a service (SaaS), social networking, mobile communications and information security, global technology mergers & acquisitions (M&A) deals grew during the first quarter of 2011 both in the number of M&A deals — up 26% (to 794) — and in total value — up 124% (to US$27b) when compared to the same period last year, according to Ernst & Young's quarterly report, Global technology M&A update, January – March 2011. Companies transacted a larger number of smaller, strategically focused deals in 1Q11, continuing a trend that began last year.

Joe Steger, Global Technology Transaction Advisory Services Leader at Ernst & Young, says:

"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. On the business side, the trends reflect that information is becoming a larger component of the value of all products and services."  Indeed, non-technology companies purchased 15% of the quarter's total value in disclosed-value deals, demonstrating that information technology increasingly is blurring into other industries.

Multiple small, strategic deals help companies cope with change

Companies continued the trend in 1Q11 of making multiple small acquisitions and weaving them together 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.

Also exemplifying this pattern were software and SaaS providers purchasing social networking companies in order to add social functions into their enterprise applications or their advertising/marketing platforms. Similarly, the rise of "deal-a-day" e-commerce companies was reflected in a series of consolidation transactions among small and regional competitors and by geographic expansion deals done by larger competitors.

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

Cloud computing and SaaS drives many deals – large and small

Cloud computing was the motivating force behind dozens of deals in the quarter, including several of the largest by dollar value. Telephone and cable network operators acquired services companies with large data centers to build up their ability to provide cloud services. In addition, two deals involving acquisitions of storage systems suitable for use in cloud computing data centers made the list of the quarter's top 10 deals by dollar value. Many of the smaller cloud deals involved adding cloud-based functions to existing applications or services.

Mobile chip M&A booms

The top 10 deals also included three semiconductor deals that brought together makers of communications chips for mobile phone technologies (i.e., 3G and 4G/LTE chips) and chip makers that produce devices for WiFi, WiMax, Bluetooth, GPS and other wireless communications technologies. There were at least half a dozen similar deals among the quarter's smaller transactions.

Mobile "ecosystems" deals drive convergence

Also in 1Q11 were multiple deals in which mobile device manufacturers purchased content and services providers, thus pushing into traditionally non-technology industries. These acquisitions are focused on the concept of building information "ecosystems" leveraging a single operating system around each company's smartphones, tablets and other mobile devices.

Internet and mobile video deals surge

The use of internet and mobile video began to soar in 2010 for entertainment, business conferencing and personal video calling purposes, and technology companies are responding by acquiring strategic video technologies. Video deals were apparent in every sector in 1Q11. Deals involving chips for video image processing were done in the semiconductor sector; for video transmission optimization technologies in the communications equipment sector; and for video-on-demand services in the internet sector.

Cross-border deals add to growth

A quest for growth was evident in the level of cross-border deals in 1Q11. Following a 2010 surge in cross-border deals, 1Q11 maintained the post-surge level: cross-border deals accounted for 34% of all the quarter's deals, compared with 34% for all of 2010 and 31% for 2009. At US$11b, the value of the quarter's cross-border deals accounted for 40% of the quarter's total value, compared with 41% for all of 2010 and 25% in 2009.

Outlook for 2011 M&A remains strong

The momentum behind global technology M&A growth makes a good case for a strong 2011; 1Q11 was the eighth consecutive quarter without a sequential decline in deal numbers, beginning with 2Q09. In addition, technology is increasingly influencing the development of the entire global economy through new waves of innovation around smart mobility, cloud computing and social networking — all of which are evident in the increasing cross-industry blur and the increasing value of information technology as a component of all products and services.

Moreover, technology companies have the fuel they need to increase M&A spending. In aggregate, the cash and investments held by the sector's top 25 companies (as defined in the report), which topped the half-trillion-dollar mark by the end of 2010, grew to US$544b by the end of 1Q11 — an 18% YOY increase from US$461b at the end of 1Q10.  "These truly exciting technology innovations, the growing cash stockpiles that technology companies are increasingly challenged to put to good use and the strong start to the year represented by these first quarter M&A results suggest a big year for technology M&A in 2011. Realistically, however, we must temper those pluses with concern over increasing divergence between buyers and sellers over valuation, geopolitical unrest, global debt issues and other unforeseeable possibilities," Steger concludes.  

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About the report

Global technology M&A update, January – March 2011 based on Ernst & Young's analysis of FactSet Mergerstat data for January through March 2011. FactSet Mergerstat data was last accessed for this first quarter report on 8 April 2011. Deal activity and valuations may fluctuate slightly based on the date that the FactSet Mergerstat database is accessed. Only disclosed value deals are used in all value analysis.  Full report is available at www.ey.com.

SOURCE Ernst & Young