Announcing the largest deal in its history, Riverbed Technology said it will hand over $110m in cash for Zeus Technology in an effort to broaden its application performance portfolio. Zeus, which sells software for load balancing and traffic management, generated about $12m in revenue over the last year and is expected to contribute some $20m in sales for the coming year. That means Riverbed is paying nearly 10 times trailing sales for Zeus, and that’s not including a potential $30m earnout for the UK-based startup. (Fellow UK-based firm Arma Partners advised Zeus on the sale.)

In addition to being a rather richly valued purchase, the acquisition of Zeus also effectively doubles the amount that Riverbed has spent, collectively, on M&A in its history. The deal will likely bring Riverbed more deeply into competition with the main application delivery control vendors, including F5 and Citrix.

From our perspective, we might note that it’s a good thing Zeus is taking its payment in cash. Why? Riverbed stock lost nearly a quarter of its value on Wednesday. (The WAN traffic optimization provider reported a bit of softness in sales in Europe for the second quarter.) The decline erased all of Riverbed’s gains for 2011, but the stock is still twice the level it was at this time last year.

When we looked closer at the dramatic falloff in M&A last month – what we have called the ‘June swoon’ – we saw that the decline not only cut spending by nearly two-thirds, it also slashed the number of richly priced deals. For the 50 largest and most significant transactions of the just-completed second quarter, which we believe have an outsized impact on setting the tone in the overall M&A market, we calculated the median price-to-trailing-sales multiple at 2.25. (Incidentally, that was up slightly from 2.15 in the first quarter.)

For the first two months of Q2, there was a steady flow of significant deals valued at least twice as rich as the ‘market’ multiple of 2.25. Those transactions included Microsoft paying 10 times trailing sales for Skype, LoopNet’s sale to CoStar Group for $860m (9.5x trailing sales), Symantec’s move to bolster its e-discovery offering with its $410m purchase of Clearwell Systems (7x trailing sales), and EMC’s reach for NetWitness, which we estimate valued the network forensic player at almost 6x trailing sales.

But by June, the relatively high-multiple deals were getting harder to find. In fact, last month saw the fewest number of above-median-valuation transactions in the second quarter with just 11 deals, compared to 16 in May and 23 in April. That recent weakness doesn’t particularly bode well for the rest of the year.

Significant transactions* in 2011

Source: The 451 M&A KnowledgeBase *The 50 largest transactions, by equity value, including publicly disclosed financial terms as well as our own official estimates

For the first two months of the second quarter, tech M&A spending flowed along at basically twice the monthly rate it had been reaching since last summer. The activity spanned virtually all sectors of technology, with chipmakers, storage vendors and telecom giants confidently and consistently throwing billions of dollars at deals in an effort to secure new growth. (Even a reluctant shopper like Microsoft got into the act.) It was like dealmakers had finally – and indelibly – moved past the Great Recession.

Then came the June swoon. Spending on tech deals in the final month of the quarter plummeted nearly two-thirds from the totals for both April and May. The value of transactions announced in June is running at just $9.6bn, the lowest level since February 2010. Of the 10 largest transactions announced in the past three months, only one came in June.

The dramatic decline in June derailed the recovery in the M&A market, leaving the spending totals in the just-completed second quarter below both the year-ago quarter and the first quarter of 2011. We’ll have a full report on second-quarter M&A activity – and what we expect for the remainder of the year – in tonight’s Daily 451 and 451 TechDealmaker sendouts.

2011 activity, month by month

Source: The 451 M&A KnowledgeBase

Spending on tech M&A in the second quarter surged to the highest quarterly rate since the Credit Crisis erupted, driven by a return of some of the largest technology buyers. Overall, deal makers announced 773 transactions, with a total value of $62bn. The Q2 total, which represented a doubling of spending from the first three months of the year, topped the previous record in the ‘new normal’ environment by slightly more than 10%.

Fittingly for a new record, big tech names have figured prominently in M&A since April. For instance, SAP announced the largest transaction in the software industry in more than two years when it reached for Sybase in May, spending $6.1bn. Also in May, IBM put together its largest deal in two and a half years, paying $1.4bn for Sterling Commerce. Even telcos got into the act, with a pair of transactions valued at more than $10bn each in the second quarter.

Overall, four of the five largest acquisitions of the year were announced in the second quarter. That helped push the number of deals valued at $1bn or more announced in the second quarter to twice as many as the first quarter (14 transactions vs. 7). It’s also worth noting that with 21 10-digit transactions already announced in 2010, the full-year number of big-ticket purchases is almost certain to exceed the 33 deals valued at $1bn or more in both 2008 and 2009.

Recent quarterly deal flow

Source: The 451 M&A KnowledgeBase

The second quarter is in the books, and we would suggest that the M&A tally is a bit deceptive. Yes, both the number of tech deals and the announced deal values hit their highest levels in a year. But lurking behind that rebound is the fact that M&A tailed off dramatically in June. In fact, the final month of the quarter accounted for just 16% of the total M&A spending in the period. The breakdown of the overall $48.4bn in the second quarter: April-May spending hit $40.7bn, while June spending was a scant $7.7bn.

We noted recently how June saw the return of gun-to-the-head sales of many tech companies, both large and small. That is reflected in the dramatic change in average deal size over the course of the quarter. (Granted, average deal size is a crude measure, but it is illustrative nonetheless.) In the April-May period, the 517 deals had an announced deal value of $40.7bn, yielding an average purchase price of $78m. In June, the average sale was less than half that level: 233 deals with an aggregate spend of $7.7bn, for an average of $33m. That’s a worry trend as we head into the second half of the year.

Overall tech M&A

Source: The 451 M&A KnowledgeBase

Whether or not the rebound got ahead of itself, the market has certainly tightened up this month. And no, we’re not talking about the equity market. (Although the sentiment is applicable there, as well, with the Nasdaq recently dipping to its lowest point in a month.) Instead, we’re talking about the M&A market. After a furious start to the second quarter, dealmaking has slipped back to the sluggish pace we saw in the first few months of 2009.

A quick glimpse at the numbers: In both April and May, we saw some 250 deals worth about $20bn in each month. So far this month, we’ve had about 205 deals worth a scant $8bn. With just three business days to go in June, we’re looking at spending being down about 60% from what it was in each of the first two months of the quarter.

We’ve also noticed the recent return of a trend that we saw more often in the opening months of 2009: the involuntary sale. In both large and small transactions, sellers have increasingly found themselves forced to take any offer that comes in. We noted that this week in the startup world, as LucidEra was turned over to a workout firm to sell its carcass. And on a larger scale, bankrupt Nortel Networks gave up on ever emerging as a viable company and began the painful process of liquidation sales. The first deal gives some sign of the resignation: Nortel sold its most valuable unit for what is likely to be less than 1x cash flow.

Second-quarter deal flow

Source: The 451 M&A KnowledgeBase