High-tech companies are still sitting on piles of cash, but they aren’t using much of it for merger and acquisition, according to Ernst & Young’s most recent global technology update.
Tech M&A value declined to $28.2 billion in the third quarter of 2012, down 52 percent from the prior year. While the total number of deals was up slightly — to 752 — smaller, strategic deals are driving the overall M&A trend, the consultancy reports.
A weakened global economy and low macroeconomic confidence drove declines in technology mergers and acquisitions in the third quarter of 2012, explained an E&Y spokesman in an email. However, technology companies continued to strike smaller, more strategic deals driven by five disruptive megatrends — smart mobility, cloud computing, social networking, big-data, and cross-sector and cross-industry blur.
The study also found that the volume and value of cloud/software as-a-service (SaaS) deals remained significantly higher than any other deal driver in the third quarter. Mobile/e-payment technologies surged in value during the third quarter of 2012, and deal value surged again for healthcare information technology (HIT), after falling in the second quarter of the year. Social networking deals fell in value, but held steady in volume.
Tech companies aren’t holding out a lot of hope that valuations will rise anytime soon. In April 2012, 21 percent of respondents to the E&Y quarterly survey expected that valuations of M&A would decline in the next 12 months; in October, that figure rose to 45 percent.
A year-end turnaround would be challenging, but not impossible, E&Y reports:
- For example, cloud/SaaS deals were strong in 3Q12 and could fuel additional M&A; PE firms still have “dry powder” — unused funds that they have to invest soon or potentially give back to their investors; and smart mobile device makers now range from disruptive leaders to weakening providers in search of turnarounds — and many in between looking for a lever to success.