Q2 earnings to shape Q3 M&A

-Contact Thomas Rasmussen, Xiaoyue Ma

Is there a correlation between the equity markets and M&A? Anecdotal evidence sure seems to suggest so. After a hot start to the second quarter for both the stock market and deal flow, tech M&A slowed as the Nasdaq cooled in recent weeks. In fact, spending on deals in June was less than half the level that it was in both April and May. Many would-be buyers now seem to be looking to earnings season – both for a report on second-quarter results and the outlook for the balance of the year – to determine if they’ll be going shopping again. We have heard this throughout the year from companies that have both the means and the desire to shop, but have refrained from any meaningful deals because of the uncertain outlook.

That sentiment was clearly evident when we tallied the results of our June survey of corporate development executives, who are pretty much the only acquirers in today’s market. When we analyzed the findings and separated respondents at large firms from those at smaller ones, almost two-thirds of large buyers predicted they will be more acquisitive in the second half of 2009. This stands in stark contrast to the results of our survey conducted last December, in which large acquirers were significantly more bearish on M&A, with less than one-third of respondents indicating they would do more purchases. We should note that the June survey was done when the Nasdaq was trading at its highest level since last October, while the December survey was done at a significantly more bearish time.

Given that there hasn’t been a raft of negative pre-announcements by tech vendors so far, second-quarter results may well come in somewhat stronger than many expect. In fact, tech bellwethers IBM and Google, up 20% and 30% year-to-date, respectively, will report after the bell Thursday and the overall consensus seems to be positive. Big Blue recently reiterated its fiscal year forecasts of at least $9.20 and $10-$11 in earnings per share for 2009 and 2010, respectively. If the tech earnings season does indeed go smoothly, we would anticipate companies to pick up their pace of acquisitions.

Drawing the line between M&A and the equity markets

Period M&A spending Nasdaq median Nasdaq median % change from prior month
October 2008 $20bn 1,711 N/A
November 2008 $13bn 1,532 -10.47%
December 2008 $7bn 1,531 -0.05%
January 2009 $3bn 1,521 -0.70%
February 2009 $2bn 1,494 -1.72%
March 2009 $4bn 1,444 -3.35%
April 2009 $21bn 1,646 13.97%
May 2009 $17bn 1,731 5.17%
June 2009 $10bn 1,832 5.84%
July 2009 N/A 1,787 -2.45%

Source: The 451 M&A KnowledgeBase and the Nasdaq

Second-quarter M&A splurge

Email: Yulitza Peraza, Brenon Daly

With Friday marking the midpoint of the second quarter, we’d note that tech deal flow is once again picking up substantially. Over the past two years, the April-June quarter has seen more M&A activity than any other single quarter of the year. And this year, just halfway through the period, that trend seems to be accelerating after a historically slow start to 2009.

Since the beginning of April, we’ve tallied $22bn worth of tech transactions – nearly triple the amount of spending from the first three months of the year. (Viewed another way, the M&A spending over just the past six weeks represents 74% of money handed over so far this year in tech deals.) Nine of the 10 largest transactions announced so far in 2009 have come since April 1.

While it’s difficult to predict what the second half of this quarter will bring, we would nonetheless note that the second quarter has traditionally accounted for a disproportionately large chunk of annual spending. In 2007, second-quarter spending represented 44% of the annual total, with last year’s level coming in at 34%. We would attribute the increased activity in the second quarter to the fact that companies typically draw up annual M&A plans and budgets at the beginning of the year, and then go shopping after that. Also this year, we suspect the rebounding equity markets are giving buyers confidence to do deals, as well as planting the thought that perhaps the prices they pay may be headed up from here.

Quarterly spending

Period Deal value 2007 Deal value 2008 Deal value 2009
Q1 $64bn $49bn $8bn
Q2 $131bn $49bn $22bn
Q3 $41bn $26bn N/A
Q4 $64bn $19bn N/A

Source: The 451 M&A KnowledgeBase