Technology M&A activity defies downturn

The technology sector has continued to see a large number of mergers and acquisitions, in contrast with the rest of the economy, as cash-rich companies buy strategic assets in areas such as cloud computing, social networking and mobile phones.

The total value of global technology deals fell 12 per cent to $25.1bn in the first three months of the year, according to research by Ernst & Young, but the decline was only about half of that seen across other industries, where economic uncertainty has put the brakes on transactions.

According to Dealogic, the data provider, the value of transactions across all sectors in the first quarter was down 23 per cent from the previous year. Deals such as Oracle's $1.9bn acquisition of Taleo, the cloud software company, announced in February, and Cisco's $5bn acquisition of video security company NDS , however, have helped keep tech sector deal volumes up.

"It is the continuing trends of cloud, mobility, social networking and bid data that are driving a need for technology companies to ensure that they are at the top of their game and they are often looking to deal to do that," said Joe Steger, head of Ernst & Young's technology transaction advisory service.

SAP, for example, admitted it could not build its own cloud computing software fast enough and so opted to buy SuccessFactors for $3.4bn at the end of 2011. Youku and Tudou, two of China's leading online video companies, announced in March that they would combine forces to compete in a fiercely competitive industry.

Many technology companies also hold large cash reserves and are able to keep spending despite global economic uncertainty. E&Y estimated that the 25 largest companies in the sector had about $634bn in cash and investments at the end of 2011. Apple's cash reserves were $110.2bn at the end of April.

Private equity deals have also bucked the trend in the technology sector. While deals have fallen off in other industries, in technology private equity deal values rose 171 per cent, from $2.1bn in the first quarter of 2011 to $5.8bn in the first three months of 2012.

Vista Equity Partners, for example, announced a £1.27bn bid for Misys, the UK banking software company, in March, and Insight Venture Partners announced a $2bn deal to buy Quest Software.

Many older technology companies, which are no longer growing rapidly but which still generate large amounts of cash, are ripe to be taken over and revamped by private owners.

"Technology is becoming a more comfortable space for private equity companies. They like the recurring revenues they see in software and IT services companies. Anecdotally it feels like our private equity teams are very busy looking at technology deals right now," Mr Steger said.

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