Disruptive technologies and slow growth have galvanized a record level of mergers and acquisitions in tech that will likely increase in 2017, according to a survey this week.
Fifty-seven percent of tech executives polled said they planned to make an acquisition within the next 12 months, well above the average of 42%, a Global Capital Confidence Barometer for Technology by EY, a global tax and advisory firm showed.
Ninety-one percent of respondents said they felt confident that the M&A market will continue at record levels, 62% said they saw the market remaining steady and 29% expected an increase, even after a sharp uptick in the last six months.
"Rather than rolling over in the face of slow growth, geopolitical uncertainty and concerns over both equity and credit, technology executives appear to be rolling with the punches,” Jeff Liu, EY global technology industry leader, transaction advisory services, said.
Many acquirers are buying companies for their innovative technologies. One such company, Oracle (ORCL, Financial), bought Textura for $663 million, Opower for $532 million and NetSuite for $9.3 billion in cash this year to expand its lacking presence in the cloud.
As in 2016, upcoming deals may veer smaller than previous years’ megamergers, when companies like EMC (EMC, Financial) and Virtustream united for over $1 billion. Although the biggest deal this year, Microsoft’s (MSFT, Financial) takeover of LinkedIn (LNKD, Financial), cost $26.2 billion, EY’s survey expects a surge in deals in the $250 million to $1 billion range.
The tech sector has become one of the most expensive year to date, however, rising 9.06%, below only energy’s 12.5% and utilities’ 12.52% gain, versus a 2.64% rise in the S&P 500.
But at the end of the third quarter, the S&P 500 Technology Select Sector had an average P/E ratio of 21.4 and P/B ratio of 4.24, lower than the S&P 500’s average P/E ratio of 24.31. The index is populated by companies like Apple (AAPL, Financial), Facebook (FB, Financial) and AT&T (T, Financial), which just announced an $85 billion plan to acquire Time Warner (TWX, Financial).
The activity in the tech space reflects the broader M&A market. In another EY survey, 75% of executives polled said they plan on a M&A transaction in the next 12 months, the highest it had recorded. The need to achieve growth as digitization and sector convergence disrupt business models and markets has driven the trend across industries.
“Companies are now looking beyond a deal’s potential bottom-line earnings and synergies and assessing how each transaction will drive competitive positioning, extend product offerings and differentiation, redefine value propositions or open the door to new markets or industries,” said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services.
Hedge funds that bet on mergers and acquisitions have also benefited from the brisk environment. Relative to the 2.4% year-to-date return of the S&P500, the Barclay Merger Arbitrage Index went up 4.06% and the HFRX Merger Arbitrage Index rose 3.02%.
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