PE firms play small ball

Contact: Brenon Daly

After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.

It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.

A December rebound in tech M&A

Contact: Brenon Daly

After three months of basically standing on the sidelines, tech dealmakers have stepped back into the market in a big way in December. During just the first week of the final month of 2011, the value of announced transactions across the globe hit $8.6bn, led by SAP’s announcement of the largest-ever SaaS deal with its $3.6bn purchase of SuccessFactors and Verizon’s mammoth $3.6bn reach for some excess wireless spectrum with its pickup of SpectrumCo.

To put that $8.6bn of deal value in December into context, consider this: it already equals the full-month total for September and is fully twice the amount of spending in November. But then, last month was particularly grim for M&A. In fact, spending in November sank to its lowest monthly level in more than two and a half years, which was the depths of the Great Recession. Further, the number of transactions in November (only 240) stands as the lowest of any month so far in 2011 and is roughly 20% below the typical monthly volume.

The September slump

Contact: Brenon Daly

It seems September wasn’t just a month to forget for the Boston Red Sox. Tech M&A also had a slump of its own this month. Although the decline in dealmaking wasn’t nearly the historic proportion of the ‘BoSox debacle,’ which saw the team drop 20 of its final 27 games and miss the playoffs, spending on acquisitions in September came in at its lowest monthly tally in 2011.

The aggregate value of all tech deals announced in September totaled just $8.5bn. (And nearly half of that amount came from a single transaction, Broadcom’s $3.9bn all-cash offer for NetLogic Microsystems.) Not only is September the lowest monthly total so far this year, it also represents a decline of one-third from spending in September 2010.

The slowdown in September also reverses the typical seasonal pattern of the third quarter. In recent years, roughly two-thirds of the entire M&A spending in Q3 has taken place in the back half of the quarter. But then, economies around the globe are currently facing more challenges and uncertainties than they have at any point since the Great Recession ended. That could make for a pretty tough finish for M&A in 2011, a year that started out solidly on the road to recovery.

M&A activity, Q3

Period Deal volume Deal value Number of deals valued at $1bn or more
Sept. 2011 279 $8.5bn 1
Aug. 2011 335 $40.2bn 6
July 2011 319 $12.9bn 4

Source: The 451 M&A KnowledgeBase

Forget the rebound, many companies see double dip

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

Uncertainty chills M&A in July

Contact: Brenon Daly

One month into the third quarter, and it looks like tech M&A activity is returning to a ‘normalized’ post-recession level. In August, we tallied global spending on tech and telco deals of just $12bn – putting Q3 on track for about $36bn of aggregate deal value. If the pace holds for the July-September period, the level would essentially match spending in Q3 2009, when the global economy was still mired in the Great Recession.

Overall, since the housing market speculation and related financial industry meltdown knocked the economy into a tailspin, tech M&A activity has ranged, loosely, from $30-50bn per quarter. As mentioned, Q3 2009 was at the low end of that while Q3 2010 was at the high end, with $46bn of announced deal value. (We noted a cold snap in the market in June, which knocked spending to just $10bn – less than half the level it had been in April and May.)

The relative weakness in M&A in the just-completed month of July came as larger economic concerns weighed on the overall market. A number of tech companies (including STEC, Juniper Networks, Riverbed Technology and Fortinet, among others) reported weaker-than-expected results last month, in some cases due to sluggish international sales. Meanwhile, closer to home, the US government teetered on the brink of default at the end of July, although a last-minute agreement to raise the debt ceiling may have headed that off. Nonetheless, the uncertainty around the outlook for the second half of 2011 appears to be blunting the appetite for acquisitions.

2011 activity, month by month

Period Deal volume Deal value
July 313 $12.2bn
June 297 $9.6bn
May 316 $26.5bn
April 287 $26.5bn
March 300 $63.7bn
February 285 $10.3bn
January 323 $11.7bn

Source: The 451 M&A KnowledgeBase

Q1 M&A: Recession hits deal-making

Contact: Brenon Daly

We’ve just finished tallying the first-quarter tech M&A numbers, and the picture is pretty bleak. In the first three months of the year, there were just 625 tech and telecom transactions, with total spending in the quarter hitting a mere $8bn. Compared to the first quarter of 2008, the number of deals dropped by about one-quarter, while spending plummeted 85%.

The main reason for the sharp decline in spending is the disappearance of big deals. In fact, for the first time in the seven years we’ve kept records on tech M&A, buyers didn’t announce a single transaction worth more than $1bn during the quarter. During 2006 and 2007, we saw an average of about 18 deals announced each quarter that were valued at more than $1bn. Even last year, when the current recession began to be felt, we still saw an average of some nine billion-dollar-plus deals each quarter. (However, on Wednesday, which is the first day of the second quarter, Fidelity National Information Services said it would acquire Metavante for almost $3bn in an all-stock deal.) The largest single transaction in the first quarter was Autonomy Corp’s $775m purchase of Interwoven.

Projecting annual totals from a single quarter is hardly an accurate way to predict deal flow, particularly in a lumpy business like M&A. (The Fidelity National-Metavante transaction underscores that.) Nonetheless, we would note that right now, 2009 is on track to post the lowest deal spending totals since the Internet bubble burst. The current low-water mark was hit in 2003, when spending totaled just $61bn. Since then, tech M&A has boomed, with spending in each of the past four years topping $300bn. But the way it looks now, 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. We’ll have a full report on first-quarter M&A on Thursday.

Quarter-by-quarter M&A totals

Period Deal volume Deal value
Q1 2009 625 $8bn
Q4 2008 721 $40.7bn
Q3 2008 733 $32.2bn
Q2 2008 716 $173.2bn
Q1 2008 835 $55.2bn

Source: The 451 M&A KnowledgeBase

Ad networks: What recession?

-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase