A new report by BCG asks the question of whether wading into tech deals can add value to companies. Based on BCG’s analysis of 37,000 tech acquisitions, the returns from such deals are mixed: about half generate positive returns for acquirers. This is the case regardless of whether the buyer itself is in the tech industry or outside of it. These findings are not out of line with findings in respect of acquisitions in other sectors.
There are, however, ways in which an acquirer of a tech company can try to tilt the odds in its favour.
BCG’s data shows that fortune often favours the bold when it comes to tech acquisitions. Deals in which the acquirer took control of a target – as opposed to ones in which it only acquired a minority stake – created, on average, higher cumulative abnormal returns (CARs). This is likely due to concerns among investors that minority owners, who are often concerned with moving cautiously into new areas, lack the positioning to exploit a target’s technology and fully capitalize on what it has to offer for the acquirer.
Interestingly, new entrants in the tech acquisition market tend to generate stronger short term returns than more experienced acquirers. On average, first time acquirers experienced a 1.04% CAR gain on announcement of the acquisition (this represents an average net gain of $60 million upon announcement of an average $200 million deal). Such first-time acquisitions often signal a recognition on the part of the acquirer of the need for a corporate transformation, as represented by acquiring more innovative products or services; the market then rewards the acquirer accordingly.
More experienced acquirers experience lesser short-term returns (ranging from an average of 0.37% and 0.90% CAR), as investors consider tech acquisitions for such firms to be a more ordinary part of the company’s existing business strategy.
However, over the long-term is where the advantages of being a more consistent tech acquirer shine through. One year after announcement of an acquisition, more experienced tech buyers (or “serial” tech buyers, as BCG puts it), in both the tech and non-tech sectors, markedly outperform the market, by some 4.4 percentage points in the relevant index. This is not the case for less experienced or first-time acquirers, who generally do not outperform the market.
