Deloitte recently published a report called Top 10 Issues for Technology M&A in 2014 describing 10 issues that companies in the tech sector should consider when developing their 2014 M&A strategies. This post is the first of a two-part series and will cover the first 5 issues to consider:
- volume and valuation;
- focus on growth;
- TMT convergence;
- monetizing tech trends; and
- cross-border M&A.
According to Deloitte, although industry trends seem to point towards greater deal volume for M&A generally in 2014 as compared to 2013, it is unclear whether this trend will be picked-up in the tech sector. What is clear, however, is that as the technologies themselves continue to expand and evolve and as the availability of internet access balloons, tech companies are regularly turning to M&A in order to respond to customer needs. Below are summaries of 5 of the top 10 issues to keep in mind when turning to tech M&A.
Volume and valuation
The tech sector saw an increase in 2013 in deal volume (3.6%) and deal value over 2012 figures. The Hardware subsector saw the largest growth in deal volume at nearly double the 2012 numbers. The Internet/E-Commerce subsector continued to thrive, with healthy increases in both deal volume and value. Meanwhile, the IT Services subsector saw a small decrease, amounting to 4.6% fewer deals in 2013.
In terms of valuation, though earnings in the tech sector continue to rise, P/E continues to fall. The highest valuations are for those companies engaging in cloud-based solutions, as opposed to those providing a licenced product. Deloitte’s report suggests that the market is viewing a cloud-based model as more scalable and more predictable than one based on licence sales.
Focus on growth
After the 2008 recession, the trend in tech was towards reducing cost, often at the expense of achieving growth. Now, as revenue targets become more aggressive, cash-rich tech companies are looking to M&A in order to reach their growth objectives. However, companies should be cautious when considering cross-subsector deals; success in the hardware market does not necessarily make for a successful software company.
Two trends are driving M&A activity in the Technology, Media and Telecom (TMT) space: (1) companies in one part of that space pushing into the other parts (e.g. Apple), and (2) companies that started as a mixture of all three subsets of TMT that are growing in size and influence (e.g. Google).
Additionally, as non-TMT companies find themselves increasingly integrating software into their products, they are simply acquiring the companies producing the software rather than attempting to create their own product.
Monetizing tech trends
Tech companies seeking growth through M&A should bear in mind that the market is increasingly expecting them to demonstrate and quickly extract value from a deal. Three growth areas are becoming the focus of buyers looking to monetize their acquisitions: cloud computing, mobility, and the use of big data and business analytics to generate improved performance.
As inbound M&A continues to increase, domestic companies should likewise swivel their sights abroad in the hunt for acquisitions, especially for location-based, cloud-based, and social technologies. However, before closing a deal, buyers should ensure that they have considered both tax minimization opportunities in the target jurisdiction and the potential tax consequences in their own. To ensure that both the acquisition and later operations run smoothly, buyers should leverage legal, business and cultural experts in the target jurisdiction.
That concludes Part I. Stay tuned for the second part of this series, canvassing the remaining 5 issues to keep in mind in tech M&A.
The author would like to thank Jad Debs, articling student, for his assistance in preparing this legal update.