84 percent of tech insiders predict tech M&A activity will stay at same level or increase over next six months; overall tech deal spending in 2014 outpaces equivalent periods in past two years combined; some concern over interest rate direction and valuations of private companies
Technology M&A dealmakers, enjoying their most revved-up year since before the financial crisis, expect the momentum to continue into 2015, according to the latest M&A Leaders Survey. The survey, issued jointly by Morrison & Foerster and tech market intelligence firm 451 Research, reports that 84 percent of tech executives predict that M&A activity will either maintain its current high level or increase during the next six months. Global tech M&A spending for the first nine months of 2014 was running higher than the same periods for 2012 and 2013 combined, the survey notes.
The twice-yearly M&A Leaders Survey, now in its sixth edition, has become a leading indicator of dealmaker sentiment in key technology markets around the United States.
"Deal flow has been strong among traditional technology segments such as semiconductors, IT, and enterprise software, as well as in mobile apps, cloud computing, gaming, cybersecurity, social media, and ecommerce," said Robert Townsend, co-chair of Morrison & Foerster's Global M&A Practice Group, who has led a number of recent high-profile transactions on behalf of Intel, SoftBank, and other tech leaders. "Despite some caution over anticipated interest rate changes, the results of the survey illustrate a healthy outlook for deal activity heading into the first quarter of 2015," he added.
However, some speed bumps could loom ahead. Forty-three percent of respondents predict that an increase in interest rates in 2015 would result in a slowdown in tech M&A activity. The survey also indicates a few potential challenges to tech M&A in the months ahead, but not enough to seriously curtail deal volume, in the view of survey respondents.
Key findings from the latest survey by MoFo and 451 Research include:
Dealmaking to Stay in High Gear
After nearly a year of torrid transaction activity, only 16 percent of survey respondents anticipate any slowdown in the next six months. "Companies' earnings are still strong [and] strategic acquirers still have cash and confidence," one respondent succinctly put it. However, a number of respondents expect a change of focus, including toward "larger and more strategic deals rather than talent and 'bolt-on' acquisitions."
Current Valuations Unsustainable?
The percentage of respondents forecasting a decline in M&A valuations for private companies tripled from the spring 2014 survey, increasing from 11 percent to 34 percent. That's the biggest downturn in sentiment toward valuations that the M&A Leaders Survey has reported over the past three years. The relative concern on this front comes as an unprecedented number of startups have raised private market funding at valuations north of $1 billion, and in the wake of an IPO wave that crested with Alibaba's record-breaker. Both trends seem unsustainable to many participants.
Late-Stage Financing Is Crimping Deal Flow
Participants were asked whether a recent spate of big-ticket late-stage venture capital financing was affecting the IPO and M&A markets. 69 percent of respondents said the billions of dollars of late-stage growth capital available to startups has slowed the number of public offerings, and 44 percent of respondents thought the increased availability of such capital has put a brake on M&A deals. However, 30 percent of respondents felt that it could actually increase tech M&A. According to one respondent: "If the supply of cash in the nonpublic market is plentiful, IPOs will slow with companies taking down capital with fewer strings. Companies will use this capital to grow organically and inorganically; therefore, M&A activity will increase."
Effects of IP Litigation â a Manageable Drag on Deals
Participants were also asked about their companies' exposure to IP litigation and their opinions regarding its impact on M&A activity. More than 60 percent said that they had been involved in some kind of infringement or other IP lawsuit. More than 75 percent said that they likely would not execute a transaction if the other party was the target of significant litigation. On the other hand, almost two-thirds of respondents agreed that deal structuring can reduce risk to manageable levels and that litigation concerns should be priced into any deal. In any event, over 82 percent said that IP litigation "requires significant additional diligence and associated cost," and a similar number recognized the need to exercise care in that diligence to avoid inadvertently waiving attorney client privilege... For early-stage tech companies, one participant noted that "IP is what the buyer is acquiring. So every instrument to guarantee success and minimize risk is required."
Antitrust and Regulatory Concerns
For the first time, in light of the increasing volume of deals meeting the antitrust reporting thresholds, and in light of several pending high-profile antitrust/regulatory reviews, the M&A Leaders Survey asked respondents about their experiences with antitrust and regulatory scrutiny of the deals in which they are involved. Over 80 percent of respondents who said that the antitrust/regulatory environment has changed over the past five years believe that it is now more of a concern for M&A deal participants, and a similar percentage felt that "international antitrust issues are increasingly significant" in today's tech M&A world, with one respondent commenting that antitrust in China is now a factor that virtually didn't exist five years ago.
The latest M&A Leaders Survey, with nearly 150 participants, drew on a broad cross-section of industry decision makers â from C-level officers (17 percent) to corporate/business development executives (21 percent), as well as investment banking and financial advisers (39 percent), general counsel (10 percent), and venture capital and private equity investors (5 percent). A little over half of those participating are based in Silicon Valley, with more than a quarter on the East Coast and the rest spread throughout the United States, Asia-Pacific, Europe, and Canada.
Morrison & Foerster has done its part to keep technology's deal economy moving this year. The firm has advised on a number of large and complex tech M&A transactions in 2014, including representing:
SoftBank in a series of deals, including its acquisitions of DramaFever, Legendary Entertainment, and Brightstar Corp. and in connection with Alibaba's IPO, the largest IPO in history;
Intel in its $1.5 billion investment in Tsinghua Unigroup's semiconductor business, its $740 million later-stage investment in Cloudera, and its $650 million acquisition of the LSI Axxia Networking Business;
VMware in its $1.5 billion acquisition of AirWatch; and
ON Semiconductor in its $400 million acquisition of Aptina Imaging.
