Tech deals market shows no sign of slowing

Tech M&A is booming in 2016 as legacy technology companies shed old assets and consolidate, and companies in other industries scoop up tech assets at a historic pace.

This comes despite the fact that the market for initial public offerings has declined, and as data shows some unicorns may wait until at least 2017 to make their market debut. In the meantime, analysts expect dealmaking to remain strong, despite macro uncertainties such as the U.S election.

The trend of megadeals from 2015 continued into the first half of 2016, according to new data from global audit firm EY. SoftBank Group Corp.’s 9984, +1.50%   $32 billion offer for ARM Holdings ARM, +0.00%   , Microsoft Corp’s MSFT, -0.74%  $28 billion bid for Linkedin Corp. LNKD, +0.23%   and Apple Inc. AAPL, +0.09%   chip supplier Analog Device Inc.’s ADI, -0.54%  $15 billion deal for Linear Technology Corp. LTC, -0.77%  marked some of the largest acquisitions ever in tech. SoftBank and Microsoft’s deals clock in as the fifth- and eighth-largest tech deals on record, according to Dealogic.

“Deal volume trended up from a very high level and aggregate value almost doubled sequentially,” said Jeff Liu, head of EY’s transaction advisory services business.

Deals volume in the technology industry rose 2% year-over-year to 1,039 deals in the second quarter, according to EY’s most recent quarterly M&A report. In the first half of 2016, 2,041 deals were struck, tracking 2% ahead of 2015’s post-dotcom-record pace.Twenty-eight of those deals last quarter were at or above the $1 billion valuation mark, blowing past the prior record of 20 megadeals set in 2015’s fourth quarter.

“The expectation is that what you’ve seen over the last two to three months will continue at least through the next six to 12 months,” said Phil Isom, head of KPMG’s global M&A practice.

Top Tech M&A on record
Date Deal Value $ Target Buyer
Oct.12, 2015 $66 billion EMC Corp. Dell Inc.
Jan. 28, 2000 $62 billion Nortel Networks Divestiture
July 20, 2015 $49 billion PayPal Holdings Divestiture
May 28, 2015 $36 billion Broadcom Corp. Avago Technology Ltd.
July 18, 2016 $32 billion ARM Holdings SoftBank Group.
Nov. 2, 2015 $30.4 billion Hewlett-Packard Enterprise Divestiture
March 2, 1999 $30 billion Aglient Technologies Inc. Divestiture
July 13, 2016 $28 billion LinkedIn Corp. Microsoft Corp.
April 2, 2007 $27.8 billion First Data Corp. Kohlberg Kravis Roberts
Feb. 19, 2015 $22 billion WhatsApp Inc. Facebook Inc.
Dealogic

The market is being driven by consolidation and divestitures, with large traditional tech companies shedding non-core assets so they can focus on faster-growing and increasingly competitive business segments, such as cloud computing. Microsoft, for example, bought LinkedIn to build up its cloud portfolio for enterprise clients, partly an effort to better compete with rivals Amazon.com Inc. AMZN, +0.21%  and Salesforce.com CRM, -0.51%  .

Divestures from large incumbent tech companies accounted for more than 175 of the deals during the second quarter, the highest volume EY has seen since it began keeping track of industry trends.

Meanwhile, companies in other industries, such as auto, industrial, healthcare and energy, are teaming up more frequently with tech startups and Silicon Valley in general to expand into faster-growing segments of the market.

Non-tech-buyer volume rose 28% year-over-year last quarter, while the aggregate value of those cross-industry tech deals jumped 95% from the same quarter last year to $21.3 billion, according to EY. Year-to-date, non-tech volume is outpacing 2015 by 27% — with 306 deals versus 241 over the same time period in 2015. The value of those deals increased slightly to $38 billion from $30.5 billion.

“Tech and non-tech companies [are] pursuing data troves to analyze for new revenue-generating opportunities,” said Liu.

General Electric is one of those companies that is encroaching on the technology industry’s terrain. It now has an incubator program for tech startups, called GE Ventures, that allows it to tap into talent and invest in early-stage technologies. It moved its headquarters to Boston earlier this year to be closer to universities such as MIT that have an abundance of tech talent.

The need to innovate at a quicker pace has also led to many cross-industry tie-ups. Traditional automakers are big drivers of this activity, as Apple Inc., Alphabet Inc., Uber and Tesla Motors Inc. TSLA, +0.32% compete with them to deliver self-driving cars.

Ford Motor Co. F, +0.40%   this summer announced investments in four startups focused on algorithms, 3-D mapping and camera sensors as part of a goal of delivering fully autonomous cars by 2021. German luxury automaker BMW BMW, -1.26%  struck a deal with Intel Corp. INTC, +0.53%   and Mobileye N.V. MBLY, +1.47%  to also get driverless cars on the road by 2021, while General Motors Co. GM, +0.79%   and Lyft teamed up on an initiative to deliver electric self-driving cars after GM invested $500 million in the ridesharing service earlier this year.

“Incumbent technology companies seeking transformation, non-tech buyers and private equity firms” led the near record-breaking growth during the quarter, said Liu.

Technology is a bit of an outlier when looking at the overall M&A market, though. Global M&A is off 26% from last year’s pace, while the U.S. market in particular is off 33% from last year, according to data published by Thomson Reuters.

“There have been some slow months, and it has coincided with some of the lack of activity in the public markets, but [tech M&A] continued and rebounded, and for the most part it’s been a good year,” said Isom.

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