Contact: Brenon Daly
After hitting a high-water mark last year, tech M&A activity has started 2016 by receding to a more normal level. Total spending on tech, media and telecom (TMT) deals across the globe in the just-completed first quarter hit $72bn, according to 451 Research’s M&A KnowledgeBase. That is only slightly more than half the average quarterly level in 2015’s record run but is roughly in line with the quarterly average from the two years leading up to the boom. Meanwhile, deal flow continued strong, with the number of January-March transactions topping 1,000 for the seventh consecutive quarter.
However, in keeping with the sense that the M&A market has moved into its post-peak phase, there have been a lot of low-multiple deals since the start of the year. One extreme example: Ingram Micro. The tech distribution giant – which, admittedly, runs at a distressingly low 1% operating margin – will put up more than $40bn of sales, but sold for just $6bn to a Chinese conglomerate in mid-February. Elsewhere, massive divestitures by both Dell and Lockheed Martin each went off at about 1x revenue.
Even viewed more broadly, valuations are getting squeezed. According to the M&A KnowledgeBase, the average multiple for the 10 largest transactions so far this year came in at just 2.3x trailing sales, which is at least a full turn lower than the average multiple at the top end of the market in any of the previous three years. In the 20 largest deals announced so far in 2016, just one has commanded a valuation greater than 8x trailing sales. Incidentally, that transaction (Cisco’s $1.2bn reach for Internet of Things platform provider Jasper) also stands as the largest VC-backed exit in Q1 by a large margin. The second-largest price paid recently for a portfolio company was just $400m.
Obviously, some of the pressure in the M&A market simply reflects the pressure in the equity market, which suffered through a short but sharp decline at the start of the year. (In the first six weeks of 2016, the Nasdaq plummeted almost 15%, with indexes from other exchanges around the world recording double-digit percentage declines during that period as well.) That bear market – along with one of the tightest credit markets, particularly for high-yield debt, in recent memory – has had more than a few dealmakers scrambling to recast prices and restructure terms to get acquisitions closed. Although most of the indexes recovered at least some or all of the early 2016 losses, the whipsawing stock market has nonetheless complicated pricing acquisitions, which could slow the rate of M&A in the coming months as well as put further pressure on valuations.
Recent quarterly deal flow
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Source: 451 Research’s M&A KnowledgeBase
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