Tech M&A outlook to remain bullish

Judging from the quantity and value of transactions in the first few months of 2011, merger and acquisition (M&A) activity in the technology sector is set to continue, say industry insiders. They add that with such healthy appetite, bolstered by cash balances unused during the earlier economic downturn, mega-deals in the range of billions of dollars are not unlikely.

M&A activity in the technology markets has been very bullish in 2011 to date, according to Benjamin Ong, mergers and acquisitions partner at KPMG Corporate Finance in Singapore.

As figures from the 451 Group show, about US$84 billion was spent acquiring 881 companies within the first quarter of 2011, the highest since the second quarter of 2008, Ong told ZDNet Asia in an e-mail.

There were many small acquisitions within the first few months of this year, and also a number of mega deals such as Microsoft's acquisition of Skype for US$8.5 billion, AT&T announcing its intent to buy T-Mobile for US$39 billion and Intel's US$7.7 billion purchase of McAfee, he pointed out.

Barring any significant negative global event, the outlook is very strong for the rest the year, Ong said, adding that 2011 will be a "tremendous year of technology M&A".

In its quarterly report, Ernst & Young also gave a positive outlook on the M&A market for 2011. It calculated that global M&A tech deals in the first quarter of this year increased 26 percent to 794 in number and leaped 124 percent to US$27 billion in value, compared to the same period last year.

Other prolific deals in the tech realm this year include Twitter's US$40 million Tweetdeck purchase, AOL's acquisition of The Huffington Post for US$315 million, Seagate's swallowing of Samsung's hard drive business for nearly US$1.4 billion, and Western Digital's US$4.3 billion bid for Hitachi's hard drive unit.

Big deals in cloud, social, e-commerce
KPMG's Ong identified cloud computing, social networking and e-commerce as segments where tech consolidation is primarily taking place.

As enterprise adoption of cloud grows, large telcos and IT services companies are jostling to become global leaders in providing cloud computing services including software-as-a-service (SaaS), he explained, pointing to Verizon's US$1.4 billion acquisition of Terremark as an example.

In the social networking space, Facebook continues to be "acquisitive" and has been eyeing mobile startups and companies that have the technology and services that provide greater interaction to the global Facebook community, such as its US$70 million Snaptu buy in March, Ong noted.

Another example is Salesforce's US$326 million acquisition of social analytics company Radian6, which indicated its intention to integrate social monitoring functions into its enterprise SaaS products, he added.

M&A activity in the e-commerce arena has been centered around daily deal sites, Ong noted, pointing to U.S. deal giant Groupon. It has been "very aggressive" in its global expansion into Asia, South Africa and the Middle East, he noted. Last December, Beeconomic, a daily deal startup in Singapore, was acquired by Groupon, and was renamed Groupon Singapore.

In the Ernst & Young report, Joe Steger, the company's global technology transaction advisory services leader, highlighted similar observations in the cloud, SaaS, social media, e-commerce and mobile sectors. He added that these M&A trends speak to the rapid change driven by cloud computing, social networking, smart mobility and the ways in which technology is becoming an increasing part of everyday life.

Mega deals still possible
Using software giant Microsoft's US$8.5 billion acquisition of VoIP (voice-over-Internet Protocol) provider Skype as an example, Michel Birnbaum, general partner at venture capitalist (VC) firm iGlobe Partners, told ZDNet Asia there is the possibility of at least another mega deal in the tech sector because there are similar companies that can command a high premium.

Big companies such as Microsoft and Google do not always have the "necessary DNA" to initiate certain types of business internally, and given they have such "huge war chests", they can "instantly" become serious contenders in specific segments, he explained in an e-mail.

KPMG's Ong concurred. He revealed that KPMG's latest International Global M&A Predictor forecast that net "debt to EDBITDA" ratio, which measures a company's ability to pay off its incurred debt, is set to drop 18 percent over the next year. This means that the large companies are well-positioned to pursue mega deals.

Companies that have weathered the financial crisis successfully have built significant cash balances which have not been utilized for acquisitive growth during the uncertain times of 2008 and 2009, he noted.

Furthermore, given that cash-rich tech giants such as Microsoft, Google and IBM are "increasingly threatened by younger, innovative companies" such as Facebook, Twitter and Groupon, they may try to recapture their market dominance by acquiring other large, complementary companies which have already successfully captured a certain strategic market share, Ong added. That would explain the attempts of Google to acquire Groupon and a Microsoft-Yahoo merger, both of which did not materialize.

Smaller M&As remain dominant trend
While he acknowledged the possibility of mega deals, Ong said smaller acquisitions will remain the dominant trend because such high-growth tech companies, whether they are large players such as Google and eBay, or smaller, younger ones such as Zygna and Facebook, are run by founders or managers who understand that "organic" innovation does not happen fast enough for them to retain their respective leadership positions.

In addition, these successful tech companies will want to solidify their position in the global marketplace through acquisitions or investments in more fragmented marketplaces in Asia, Africa and the Middle East, he highlighted.