Global trends in merger and acquisition activity are reaching record numbers, with last year alone generating $3.5 trillion in deals. Of that total, the technology industry accounted for $214 billion. Although the industry has not generated this type of deal activity since 2007, the facts underlying these deals aren’t necessarily indicative of growth so often associated with M&A activity.

Since 2009, tech companies have been responsible for around $900 billion in deals. This seems like a staggering number, but the reality is that only 10% of that number have represented “growth” transactions. The majority of deals in the tech industry are drive by “non-growth” deals, where companies have gone private or spun their business affiliates in order to become leaner, more centralized entities. The deal totals are also misleading because 60% of the industry’s volume is generated by five companies: Facebook, Google, Microsoft, Oracle, and SAP. Just over 40% was generated from three deals alone.

With U.S. Markets experiencing record growth and deal numbers, these facts leave one wondering why a greater portion of these transactions aren’t centered around growth that the rest of the market seems to be experiencing. The answer seems to lie with activist investors seeking to realize short-term gains from their investments in the industry. While some companies in the industry have done well in relation to the markets, other technology companies have become overwhelmed with cash reserves and trade at price-earnings multiples,  making them prime targets for activist investors. These investors buy what they believe to be undervalued stock and, rather than take advantage of potential growth strategies, pressure management to satisfy the company’s value investors and return cash to them via stock buybacks, dividends distributions, and spin-offs.

Yahoo is the perfect example of a company that has had to set aside growth initiatives in the industry as a result of this type of pressure. Well into 2014, Yahoo had completed 20 acquisitions. Since activist investor, Starboard Value, took its stake, Yahoo has not completed a single acquisition and has even announced a spinoff of its stake in Alibaba.

Public companies still in the early stages of their life cycle also contribute to the lull in growth activity in the merger and acquisition field. Companies like LinkedIn and Twitter, having recently gone public, are still largely generating growth internally and see no reason to enter the fray of tech acquisitions. Of companies worth $1 billion or less, an ever-growing percentage is made up of privately-held start-up companies. Privately-owned tech start-ups aren’t in the game for going public, as a glut of venture capital and private equity funding has left them fluid with enough cash to fund their own growth. The rise of this portion of the industry could lead to a sharp rise of “growth” transactions, whether through IPO’s or through being acquired by bigger public companies, as these companies become primed to move forward into the next phase of their life cycles and compete on a larger stage.

The one truly interesting thing about the transactional market in the tech industry is that the old guard and the new seem to be at a crossroads as to how they will move forward. As older tech companies stand pat with cash reserves in attempts to placate activist investors seeking quick return of value, younger companies are bursting onto the scene with money raised in private markets that give them the freedom to pursue the growth strategies they deem prudent in a market where anticipation mounts looking to the industry’s future.

Philip Jones

 

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