The Deal Landscape and Trends of the M&A Market

The economy continues to sputter; the sequester has scared the business community; Congress is paralyzed in partisan war; yet the stock market is strong. The outlook is calm, but uncertain. All this means it is still a good time to be selling, acquiring, merging or divesting companies. M&A activity in the overall technology sector in 2012 was virtually the same as in 2011, so the market remains active. But the value of the 2,934 publicly-disclosed broader sector deals in 2012 was less, on average, than in 2011. Prices are steady and judging by the market, reasonable and affordable. Sellers and divesters are somewhat less enthusiastic, but they can expect to close deals, perhaps for a little less than they might have liked.

Overall global merger and acquisition volume declined over the past three years from about 32,500 completed deals in 2010, to just under 28,500 in 2012. However, the value of completed deals has held steady, going from $1.93 billion in 2010 to $2.4 billion in 2011 and back to $2.04 billion in 2012. The technology M&A market declined slightly during 2012, from 755 deals completed in the first quarter, to 667 in the fourth, but the total was virtually the same as in 2011. Let’s put that down to tentative improvement in the global economy and an uptick in the technology, consumer discretionary and financial sectors.

A trend to note for 2013 and beyond is accelerating movement toward smart mobile technology, cloud/software as a service (SaaS) and social networking. Assuming that trend continues, companies in these subsectors will become more and more attractive as partners. Amenity-based revenue streams and long-term, service-based contracts are very valuable to potential buyers. Such middle market companies in travel, hospitality, foodservice and retail command premium values. Companies based on older technologies not amenable to updates, nor able to use social media or new, mobile venues easily, will tend to decline in value. This has been particularly the case for software companies continuing to sell one-time licenses versus recurring monthly subscriptions to their software.

Driving these trends is the ever-present issue of demographics. The 18 to 29-year old age group fundamentally uses technology differently than older generations. They are now driving the research, development, products and services of the IT world.

Faster than you can say mainframe, word processor, PC, disk drive and laptop, this generation has moved on to the smartphone, the iPad® and mobile apps. Who knows what will come next. What we do know is that in the long term this will change infrastructure needs, customer service practices, hiring policies and security requirements. Hot social media startups are changing the face of our industry as we speak. Have you used 9Lenses yet to survey your employees to gain a clear understanding of your organization through their eyes? Have you investigated Bloomfire, an intranet solution to enable workers to connect instantly with subject matter experts in your organization? What about CrowdTwist, Actiance or Nestivity?

Technology will continue to change rapidly, so it’s imperative that you understand the life cycle of your product, and if you intend to sell, that you do so at the right time. As with everything else in life, we won’t be going back to the good old days, so you need to keep up with market trends or be left behind.

Although it is not time to relax just yet, the global economic collapse has been averted and the global economy is projected to grow by more than 3.5 percent. The technology, hospitality and retail sectors have outperformed the overall market.?This also holds true for M&A activity, particularly in the lower middle market where strong valuation metrics continue to be seen.?There is increased momentum toward smart mobile technology, cloud/SaaS and social networking products. Most are optimistic about 2013 with specific areas of strength within both the B2B and B2C sectors. As you develop your exit strategies consider that cross border deals are increasing; technology is rapidly changing making it important to understand your product’s lifecycle; and the fundamental change in how the youngest demographic uses technology will have a long-term impact on our industry’s infrastructure needs, security requirements, human resource practices and more.

(This article is based on John Rovani’s presentation to the annual Executive Vendor Summit in March 2013).

John Rovani is managing partner of a specialty strategic and investment banking advisory firm focused on the highly synergistic travel, hospitality, foodservice and retail technology and services sectors.

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