Q3 2013 in the technology M&A sector

With a quiet Q1 and Q2 in the technology M&A space, Q3 2013 brought a pleasant surprise with its surge of deal activity, making for a healthy (and busy) end of year for the sector and raising hopes that the momentum will carry into 2014, surpassing the prosperous 2012 numbers, and making next year the year of the tech deal.

Q3 dominated this year in both volume and value for technology sector deals in the U.S, the global technology hub, with volume up 97% and value up $433 million from Q2. While there were over a half dozen deals surpassing the billion dollar mark in Q3, the volume and value increase appears to be the result of a combined handful of major strides and multitude of smaller steps in the right direction. That is, 24 of the 63 deals of Q3 were worth less than US $50 million, with large transactions of US$250 million or more remaining at around the same percentage of the pre-Q3 blitz (33% of deals). Nevertheless, according to Mergermarket, Q3 2013 did see over eight North American large-cap deals above US$5 billion, with a value at over US$209 billion.

Mergermarket further reports that globally, Q3 2013 saw 528 technology/media/telecommunication (TMT) sector deals worth US$254.4 billion, making Q3 2013 the most active of any quarter on Mergermarket record (by value) since 2001 and the highest volume since Q2 2008. Global technology M&A, in particular, more than doubled its value in Q3 from Q2, reaching US$59.7 billion, making Q3 2013 the highest since 2006. The surge in technology M&A did not, however, transcend across all borders, with deal value down in Q3 2013 from Q3 2012 in both Europe and Asia.

The megatrends that got us there

There are several possible explanations for the surge in technology deals in Q3, including an increased confidence in the global economy to the highest level in years, and a resultant deal-making confidence. However, among the surest of explanations, as can be evidenced by the types of deals closed throughout the quarter, is the desire of major companies to align themselves with one or more of the five technology “megatrends” for 2013: smart mobility, social networking, cloud computing, big data analytics and accelerated technology adaptation.

Ernst and Young (EY) pegs smart mobility, cloud and software-as-a-service technologies as the megatrends that really soared in Q3, sparking deals by companies looking for strategic growth opportunities as well as those looking to survive after having been weakened by the ever-changing smart mobile landscape.

While companies both inside and outside of the technology industry are active in software and technology related M&A, PricewaterhouseCoopers (PWC) reported that the corporate technology giants in particular remain cash rich, motivating these giants to seize opportunities for growth by scooping up smaller companies with the technology to propel them forward in these new spaces and set them apart from the competition.

With some major names seeking new ways to build out their current platforms and lead the way into the next generation of IT offerings, software development appears to be the path of choice. Deal value in the software sector increased 716% from Q2 to Q3 2013, making up 45% of the total technology deal value in the U.S and comprising 38% of deal volume across the technology deal space. Software sector transactions were thereby a primary driver behind the Q3 surge.

To Q4 and beyond?

As  megatrends continue to develop and transform the technology industry, technology companies and non-technology companies alike will undoubtedly continue to search for avenues to capitalize on these trends, keep steady on the mega-trend bandwagon, and capitalize on the competitive advantage that comes with being a forerunner of such technology. EY reports that technology deal volumes are expected to continue to increase into the New Year, and while many others agree that Q3 is far from a bubble and that the megatrends will push the present deal activity beyond Q4, it is uncertain whether deal value will be able to surpass the Q3 high.

The author wishes to thank Sarah Bertrand, articling student, for her valuable  assistance in preparing this legal update.