Spending on Q2 tech M&A slumps as big buyers take an early summer holiday

After two consecutive years of surging tech M&A, we now have two consecutive quarters of slumping tech M&A. This year opened with Q1 spending on tech deals totaling only slightly more than half the average quarterly level of the recent two-year record run. Spending in Q2 dropped even further, leaving the value of tech deals announced around the globe for the April-June period at its lowest quarterly level in four years, according to 451 Research's M&A KnowledgeBase.

Recent quarterly deal flow

PeriodDeal volumeDeal value
Q2 2017863$55bn
Q1 2017939$79bn
Q4 2016893$163bn
Q3 2016969$156bn
Q2 20161,062$112bn
Q1 20161,050$73bn
Q4 20151,063$185bn
Q3 20151,162$85bn
Q2 20151,074$208bn
Q1 20151,040$121bn
Q4 20141,028$65bn
Q3 20141,049$102bn
Q2 20141,005$141bn
Q1 2014854$82bn

Source: 451 Research's M&A KnowledgeBase

The main reason for the recent slump in spending is the disappearance of many of the tech industry's biggest buyers. Only one of the five largest deals announced so far in 2017 printed in Q2, according to the M&A KnowledgeBase.

Recent tech M&A activity, monthly

PeriodDeal volumeDeal value
June 2017271$15bn
May 2017316$24.6bn
April 2017276$15.2bn
March 2017299$38.9bn
February 2017277$20.7bn
January 2017363$19.8bn
December 2016272$39.5bn
November 2016285$40bn
October 2016336$83.2bn
September 2016312$30.1bn
August 2016306$31.5bn
July 2016345$94.1bn
June 2016384$67bn
May 2016329$23.8bn
April 2016349$20.7bn
March 2016343$23.9bn
February 2016323$28.3bn
January 2016384$21bn

Source: 451 Research's M&A KnowledgeBase

Altogether, acquirers announced $55bn worth of global tech and telecom transactions in Q2, according to the M&A KnowledgeBase. That represents a decline of 30% from the $79bn in Q1 2017, with all three of the past months suffering through a pronounced summer slowdown. The M&A KnowledgeBase shows that every single month of Q2 came in below the average monthly spending in Q1.

Vote of no confidence

The quarterly decline registered so far this year has been particularly pronounced at the top end of the tech M&A market. According to our data, the average value of the 20 largest tech deals announced in the first three months of 2017 stood at $2.9bn, fully 70% higher than the $1.7bn value for the average size of the 20 largest transactions announced in Q2.

The recent summer slump has dragged the total spending for the first half of 2017 to just $134bn. Annualizing the six-month performance, this year is tracking to roughly $270bn worth of tech deals. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015.

At a macroeconomic level, it would appear that much of the confidence needed to make multibillion-dollar bets on M&A has eroded in recent months. Most forecasts for economic growth have been pulled back to a level more or less in-line with recent years, a reversal from the acceleration seen after the election of the presumed 'pro-growth' President Donald Trump and a more 'business-friendly' Congress. Meanwhile, the Nasdaq Composite, which had moved higher every single month from January to May, slipped in June. Again, it was well-known tech companies that led the decline in the final month of Q2. For instance, shares of Apple and Google both lost 6% in June, although they still have outpaced the broader US equity indexes since the start of the year.

Missing the bigs

The main reason for the sharp drop in M&A spending from Q1 to Q2 is the recent disappearance of the big enterprise vendors doing big deals. In the first three months of the year, Intel, Cisco and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn. Since then, however, those tech bellwethers – along with other companies that traditionally help set the tone of the overall tech M&A market – have been replaced primarily by telcos and private equity (PE) firms. (We look at PE shops, which printed more tech transactions in Q2 than any quarter in history, more fully in a separate section below.)

No single tech market has been hit harder recently by the M&A hiatus by well-known buyers than the once-thriving application software sector. Salesforce didn't do a single deal in Q2, after only announcing one in Q1. That comes after a 2016 shopping spree that saw it ink 12 transactions at a cost of $3.2bn, according to an SEC filing. SAP has been entirely out of the market in 2017.

Even when the application software giants have shopped, they have trimmed the size of their purchases. For instance, Oracle's largest print in 2017 is less than one-tenth the size of last year's $9.5bn consolidation of NetSuite, which stands as the largest-ever SaaS deal. (Subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms of Oracle's big print this year, its reach for advertising analytics startup Moat.)

Since large vendors are also typically large acquirers, their absence has left application software a dramatically diminished segment of the overall tech M&A market. Application software accounts for just $8bn of the $134bn in announced deal value so far in 2017, according to the M&A KnowledgeBase. That means that spending on application software transactions accounts for just 6% of total tech M&A so far this year, just half the comparable level it has held over the previous five years. Further, on an absolute basis, the $8bn handed over to purchase application software providers so far this year stands as the lowest level for the opening half of any year since the recent recession.

Pricing pressures

With big buyers stepping out of the market, valuations have also come down. In general, corporate acquirers tend to pay higher multiples, certainly when they are looking to buy their way into a growth market. Early in 2017, we saw that in the astronomical valuations that Intel paid for its bet on autonomous vehicle technology vendor Mobileye ($15.3bn for a business with roughly $400m in sales) as well as Cisco's step into the fast-growing application performance management (APM) sector. The networking giant had to effectively outbid the public market for APM startup AppDynamics, and ended up paying $3.7bn, or 17x trailing sales.

As those growth-focused acquisitions have been replaced by 'value' deals in more mature tech markets, M&A multiples have declined accordingly. Overall, of the 30 largest overall tech transactions announced since the start of April, fully half of them have been valued at just 3x trailing sales or less, according to the M&A KnowledgeBase. As one indication of that shift in strategy from Q1 to Q2, we would note that four of the five largest VC-backed exits so far in 2017 as tallied by the M&A KnowledgeBase have come in the January-March period. Further, our data shows that there were twice as many VC portfolio companies sold at double-digit multiples in Q1 than in Q2.

A similar situation has played out in the separate-but-related PE industry. When erasing tech vendors from US stock markets, buyout firms have shown themselves ready in recent years to pay price-to-sales multiples in the high single digits (e.g., Cvent, Marketo, SolarWinds). However, they haven't had to stretch anywhere near that far in most of their recent take-privates. Consider these Q2 prints for PE shops: Apollo Global Management is paying just 2.2x trailing sales for West Corporation, ESW Capital is paying 1.7x trailing sales for Jive Software and Marlin Equity Partners is picking up troubled telecom expense management specialist Tangoe for roughly 1.6x trailing sales.

PE: Built to buy

As many of the well-known corporate acquirers have stepped out of the market, their place has more than been taken by their financial rivals, PE firms. These well-capitalized buyers – who, collectively, hold almost $1 trillion of uninvested capital – have increasingly been targeting the tech sector. That's true across the PE landscape, from the diversified mega-buyout funds to the numerous tech-focused firms and even down to the small shops that are nabbing software or services companies with only a few million dollars of cash flow.

With all of these active financial acquirers, it's no wonder that Q2 saw buyout firms announce more tech deals than any quarter in history. To put the recent explosion of PE activity into more of a historical context, consider this: the 227 tech transactions that buyout shops announced last quarter is more than the annual totals for the industry for any year up until a decade or so ago, according to the M&A KnowledgeBase. Further, for the first time in history, PE firms in Q2 announced more purchases than acquirers trading on the NYSE or Nasdaq. In years past, these publicly listed buyers have announced two or even three times the number of PE deals.

Underscoring the deep pool of financial acquirers, M&A KnowledgeBase data shows that several PE shops averaged at least one transaction each month in Q2, including Thoma Bravo, Vector Capital, Insight Venture Partners, GTCR, Apollo Global Management and others. For its part, buyout firm Vista Equity Partners ran at an even more frenetic pace. Between direct investments and those done by its portfolio companies, Vista averaged a staggering four acquisitions every month in Q2. That's twice the rate that virtually any corporate acquirer has ever maintained.

If anything, the overall pace of buyout activity is only likely to increase. Private capital research firm Prequin recently noted that the size of the average PE fund has increased nearly 70% over the past four years to $625m, while the time required to raise that larger fund has declined from an average of 20 months to just 12 months. In other words, PE shops have been able to raise two-thirds more money in one-third the time. That helps account for the mountain of money the industry is now sitting on and looking to put to work in the tech sector at an increasing rate. This means that financial buyers are almost certainly set to continue to outpace their corporate rivals. For instance, in the April edition of the M&A Leaders' Survey from 451 Research and Morrison & Foerster, respondents forecast that PE firms would be more active than strategic acquirers in the tech M&A market. That marked the first time in the 11 editions of our survey that buyout shops have been ranked ahead of the traditional M&A market leaders, tech vendors.

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