Technology M&A Activity Remains Steady, Despite Dropoff in Value

By Lauren Horwitz

Over the past couple of years, technology mergers and acquisitions have run at a fast clip.

According to 451 Research’s M&A KnowledgeBase, 2018 technology M&A activity totaled $584 billion. In 2019, that number decreased to $392 billion — about 25% less spent globally on M&A. But that’s still “abnormally high,” said Scott Denne, a research analyst at 451 Research. And since 2014, emerging technology M&A activity has increased by a factor of almost nine. Some 30 machine learning-focused companies, for example, were targets in 2014. But in 2019, that number increased to 248.

451 Research’s Scott Denne

We spoke with Denne about where mergers and acquisitions stand, despite global uncertainty and macroeconomic flux. Recent technology buys, such as OpenText’s recent purchase of Carbonite for $1.42 billion aren’t going away, though they may be tempered over the next 12 months, Denne said.

Channel Futures: It seems like an active time for M&A. Why?

Scott Denne: The last couple of years in terms of technology targets [for M&A] have been abnormally high, particularly in terms of deal value. This year is down — about 25% fewer dollars spent globally on tech M&A. But that’s down from a record $500-plus billion last year. But it’s still an abnormally high year.

Over the last couple of years, all the groups that are typical buyers of tech having been buying at once: Salesforce, Microsoft, SAP. SAP did two multibillion-dollar acquisitions, IBM did the largest ever software acquisition with Red Hat [a deal valued at $34 billion].

CF: Has the regulatory environment of late made deals harder to do or easier?

SD: Congress’ CFIUS [the Committee on Foreign Investment in the United States] has taken a stronger hand and undone a few deals, and it’s taken a harder look at others It is having a chilling effect, but not enough to bring down the high levels of activity. But it makes some deals harder to do.

CF: Machine learning and analytics seem like common targets. Is that because the acquiring company doesn’t have the expertise internally?

SD: The application stack has become so much more complex. It is hard for any one company to claim they are winning the whole thing. With the introduction of cloud services, the shift to more Agile development tactics [and] the move to DevOps (integrating development and IT) — that has mixed up the landscape. In the old days, you had your database, server and application developers working on top of it. Now you have an application with multiple databases. That has led to more M&A. In terms of IT infrastructure and security deals there has been more volume.

CF: Why do some M&As fail to get off the ground?

SD: It’s no doubt they are hard to do. Companies frequently get them wrong, from not understanding how two companies will mesh culturally, whether it’s bad timing by buying something at the top that will shortly decline, [or] failing to keep key staff members on board after an acquisition. Employees, once they exit, want to go on to the next thing.

CF: What about the recent acquisition of Carbonite by OpenText?

SD: It’s a typical acquisition for OpenText; they are focused on buying things with a particular financial profile. Their core is in information management; backup and recovery doesn’t stray too far from that. They typically buy companies that are just a bit troubled, but not distressed. Carbonite had recent problems meeting its revenue targets for its backup and recovery technology, but it’s not under water.

CF: What do the next 12-18 months look like in M&A activity?

SD: In our M&A Leaders survey [from 451 Research and Morrison & Foerster], we asked bankers, private equity and C-level executives what their deal flow would look like over the next 12 months. [Overall, the majority of respondents predicted an increase in activity (40%), 32% predicted it would remain the same, 28% predicted a decline.] Private equity acquisitions – which have been at an all-time high – will continue. That part of the market will continue to grow, regardless of the macroeconomic environment. I would expect a decrease in corporate or strategic acquisitions, and this was suggested in our survey as well. I would expect a decrease in valuations and total deal value. But we’re still talking about an abnormally high and record year.

Things like general fear of a recession, the potential impact of [the Trump] tariffs, Brexit — those things are all being watched, but no one is seriously alarmed. They are ghosts in the background that, if they were to swing one way or the other, could have impact.