Marquee tech deals go from glut to rut as consolidations stall

  • TECH
  • Thursday, 14 Sep 2017

The logo of Israeli driverless technology firm Mobileye is seen on their office building in Jerusalem March 13, 2017. REUTERS/Ronen Zvulun

Where have all the big-ticket tech acquisitions gone? 

There’s been only one technology deal topping US$5bil (RM20.95bil) this year – Intel Corp’s US$14bil (RM58.66bil) takeover of Mobileye NV in March. Last year, a dozen technology deals of more than US$5bil (RM20.95bil) were announced. In 2015, there were seven. 

“It is rather surprising, simply because over the past two years, which were watershed years, in 2015 and 2016, we saw so many,” Rick Climan, Hogan Lovells M&A partner, said in an interview on Bloomberg TV. “But we’re coming off two blockbuster years and there’s bound to be a falloff. 2015 and 2016 were monster years for tech, perhaps even aberrational years with the benefit of hindsight.” 

It’s possible companies are simply taking a break after two banner years, returning to a calmer time. Only two technology deals bigger than US$5bil (RM20.95bil) were struck in 2014. Now, buyers are digesting their targets, rather than seeking new deals, Climan said. There are also fewer strategically logical transactions possible that wouldn’t face antitrust hurdles, he said. 

With three and a half months to go to Dec 31, there’s still time for deals to come together. Toshiba Corp is already in talks to sell its memory chip business. Parthenon-EY, one of the business units of what was formerly called Ernst & Young, is working on two large technology deals that could be announced before 2017 ends, according to Barak Ravid, the consulting firm’s managing director and co-head of technology. 

Global technology merger and acquisition volume is down 54% from a year ago, at US$106bil (RM444.19bil), according to data compiled by Bloomberg. The number of publicly announced deals of US$1bil (RM4.19bil) or less are actually ahead of last year’s pace by 2.7%. The larger deals have fallen precipitously. 

Chip flurry 

The semiconductor industry, where deal volume is down 85%, was particularly busy in 2015 and 2016, with seven transactions of US$12bil (RM50.28bil) or more. Qualcomm Inc ranked at the top with its US$47bil (RM196.95bil) agreement to buy NXP Semiconductors NV. 

During that same period, Hewlett Packard Enterprise Co. merged its enterprise services segment with Computer Sciences Corp and sold its software business to Micro Focus International Plc for US$8.8bil 9RM36.87bil). Other US$5bil (RM20.95bil)-plus deals included Microsoft Corp’s US$26bil (RM108.95bil) purchase of LinkedIn Corp and Oracle Corp’s US$9.3bil (RM38.97bil) NetSuite Inc acquisition. 

Serial acquirers may be taking the year to prepare their next moves, said Bill Choe, a White & Case technology M&A partner. 

“They need time to settle,” Choe said. “These are new technologies that they’re taking on with massive amounts of new bodies. You’ve got to take care of what you’ve invested in.” 

Tech ready 

With interest rates low and trillions of dollars in cash on balance sheets, technology companies should be well positioned to do large deals. The Nasdaq is up more than 19% this year, and more deals get done when equity markets rise. While target valuations grow more expensive, buyers’ equity also rises and business confidence among management increases. 

Not all technology companies are bred to buy, Choe said. 

“If you’re already investing organically, it may make more sense to reinvest earnings into research and development instead of M&A,” Choe said. “There may not be the right large target out there that’s available.” 

Apple Inc and Alphabet Inc, the world’s two largest publicly traded companies by market capitalisation, can easily afford deals of more than US$5bil (RM20.95bil). Yet Apple’s biggest transaction was its US$3bil (RM12.57bil) acquisition of Beats in 2014. Alphabet’s Google hasn’t spent more than US$5bil (RM20.95bil) on a deal since it acquired Motorola Mobility Holdings LLC in 2012 for US$12.5bil (RM52.38bil). That transaction didn’t go well for Google, which sold what remained of Motorola for less than US$3bil (RM12.57bil) in 2014. 

While Inc, the world’s fifth-largest company by market value, spent about US$14bil (RM58.66bil) on a standout acquisition this year, its target wasn’t in the tech industry. Instead, Amazon chose organic grocer Whole Foods Market Inc for its first deal valued at more than US$1bil (RM4.19bil). 

Tax reform 

Some of Parthenon-EY’s clients that execute larger technology deals were hoping for more clarity on tax reform this year, said Ravid. That has “stalled some plans,” he said. 

While Republican-led efforts to lower the capital gains tax might eventually encourage tech companies to bring money back to the US, it won’t likely spur significantly more M&A activity, Climan said. 

“It’s not like Silicon Valley is waiting breathlessly for repatriation tax relief anyway,” Climan said. “Even if there were a repatriation tax holiday, given the choice, many tech companies might well be inclined to use their repatriated cash to go out in the market and buy back their stock or pay a dividend. We’ve seen this movie before. It’s essentially what happened in 2004, and that repatriation tax holiday was widely viewed as a failure from a policy perspective.” 

Changing priorities 

Technology stands out from other sectors because the driver of acquisitions changes dramatically and frequently, Climan said. As some segments, including semiconductors, consolidate and antitrust concerns preclude more expansion, companies shift to new priorities, he said. 

Connecting cars with Internet-enabled technology, for example, pushed Qualcomm’s purchase of NXP and Intel’s deal for Mobileye. Samsung Electronics Co acquired Harman International Industries Inc last year for US$8.6bil (RM36.03bil) for the same reason. 

Virtual reality and artificial intelligence may be the next drivers of tech M&A, said Climan, although the size of the target companies have remained small. 

Then again, one large deal may beget several more in response. 

“A lot of tech M&A is about the desire to stay relevant,” Choe said. — Bloomberg

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