M&A unspooked by blood-red October

The largest software acquisition in history helped push overall tech M&A spending in October to the second-highest monthly total in the past two years. Acquirers around the world spent $72bn on 319 tech deals, according to 451 Research’s M&A KnowledgeBase. About half of the spending came from IBM’s blockbuster purchase of Red Hat just before the end of the month.

As the most significant transaction in October – and, indeed, of 2018 so far – Big Blue’s big bet on the open source software pioneer is noteworthy both in terms of scale and strategy. For starters, the $33.4bn price is as large as the second- and third-largest software deals combined, according to the M&A KnowledgeBase.

For 107-year-old IBM, its make-or-break pickup of Red Hat marks the first time the company has splashed out more than $1bn on a single acquisition in two and a half years. In that same time, however, the tech veteran has spent tens of billions of dollars on dividends and stock repurchases as it struggled to find revenue growth. For its part, Red Hat has reported 65 consecutive quarters of revenue growth.

IBM’s risky bet on the open source software provider stands out even more when we view it against the tumultuous month of October in the overall economy and, especially, the equity markets. Once-bankable investments in many of the tech industry’s main names turned blood red last month. For instance, Amazon, which secured a market value of $1 trillion in September, saw its shares plummet 20% in October alone. More broadly, the tech-heavy Nasdaq Index ended the month down roughly 9%.

Economic uncertainty and Wall Street volatility can complicate pricing for acquisitions, as well as prolong negotiations as parties sometimes revise their assumptions or recalculate their models if the outlook for the future becomes particularly cloudy. Those potential snags tend not to show up in transactions by corporate acquirers until some months later. In contrast, the impact tends to be more immediate for financial buyers, who rely more than their strategic rivals on the economically sensitive debt market to finance their deals.

Although October could very well be a blip in an otherwise record run by private equity (PE) acquirers this year in the tech industry, we would nonetheless note that buyout activity slumped notably last month. According to the M&A KnowledgeBase, PE firms in October spent just half of the monthly average of the preceding nine months of 2018.