One of the reasons tech companies used to hoard cash was for prospective mergers and acquisitions — a trend that market research firm Ernst & Young Global Ltd. says is picking up. (See Unknown Document 20030 .)
M&A among technology companies in the third quarter of 2010 climbed 43 percent over the comparable prior-year period. A couple of interesting things E&Y notes in its most recent report: First, companies are sitting on bundles of cash that could be used for acquisition. Second, offshore bundles of cash are a hindrance for companies that may want to buy businesses in the US. (See Cash Hoarders & the Confidence Crisis.)
Technology firms are well positioned to execute further transactions, according to Joe Steger, Global Technology Transaction Advisory Services Leader at Ernst & Young. “Leading technology companies have good financial flexibility, owing to significant cash balances and little leverage; however, many US technology companies have significant amounts of cash 'trapped' offshore, which limits the amount of cash available for US acquisitions.” It also limits the tax base available to the US. (See More on Cash Hoarding & the Confidence Crisis.)
But companies are spending more money on their acquisitions. Total deal value in the third quarter 2010 increased by 48 percent compared to the same period last year, and 50 percent over the previous quarter to $46.2 billion. In addition, 11 deals over $1 billion were announced in the quarter, bringing the year-to-date number of big-ticket deals to 20, one more than in all of last year and six more than in all of 2008.
Companies are no longer waiting to secure deals they consider strategic: In the third quarter most of the activity was in initiatives such as e-commerce, cloud computing, social networking, online gaming, wireless telecommunications, and mobile security. “Growing demand for connectivity and real-time access to actionable [sic] information over mobile devices is transforming the sector and propelling the globalization and convergence of technology platforms with other industries, spurring deal activity,” says Steger.
Half the number of deals in the quarter were cross-border, says E&Y. “After a pause in the first quarter of 2010, cross-border technology deals have significantly outpaced domestic deal growth for the past two quarters. Following a strong rebound in the second quarter of 2010, cross-border deal numbers surged in 3Q10, accounting for 51 percent ($23.5 billion) of total deal value.”
E&Y expects the key trends driving M&A to continue. There are a few things that could hinder future activity, though. First is companies' reluctance to part ways with their cash. The second, says E&Y, is a continued downturn in global economic confidence could dampen the short-term outlook.
Would you rather see tech companies spend their cash on cross-border deals, or sit on their money until they are willing to spend it onshore?