by Brenon Daly
With most tech vendors having completed the song and dance of financial reports for last year, it’s becoming inescapably clear that a lot more changed than just the calendar when 2018 rolled into 2019. Business boomed last year, but it’s more of a whimper so far this year. That shift is having an impact on the tech M&A market, where acquirers are switching from playing offense to shoring up their defense.
Through the first three quarters of 2018, corporate confidence soared as cash flowed. Double-digit revenue increases, coupled with 20%+ expansion on the bottom line, pushed broad-market equity prices to record levels last summer. In contrast, looking ahead to this summer, earnings at most companies will likely flatline or even shrink slightly. Being stuck in place or falling behind doesn’t inspire businesses to place big, bold bets.
Overall, 451 Research’s M&A KnowledgeBase shows spending on tech deals around the globe has ticked down by more than 10% so far this year compared with the same time last year. But the change in sentiment – and the resulting strategy – comes through even more clearly when we look at the headline prints for 2018 and 2019.
Last year, when seemingly no deal was off the table, the largest tech transaction saw IBM roll the dice on Red Hat. If not a bet-the-company deal, the $33.4bn purchase is at least a make-or-break transaction for the current leadership and its (expensively acquired) reorientation of its cloud business, which it is banking on to spur growth after a protracted slide in revenue at Big Blue.
So far this year, however, acquisition ambitions are a little more muted. This year’s biggest deal, which is one-third smaller than the 2018 blockbuster, is a tried-and-true bit of industry consolidation: Fiserv’s $22bn pickup of First Data. Underscoring 2019’s conservative approach to dealmaking, we would note that Fiserv paid 4x trailing sales in its transaction, while IBM paid 10x trailing sales.
Of course, as Q4 2018 showed, markets can change in an instant. Companies that are riding high one day can drop hard and fast. And while no one is really talking about a recession in 2019, no one is talking about a continuation of last year’s record expansion, either. As business slows, the highly correlated M&A market is likely to follow suit.
