Q3 tech M&A spending tops the charts, but is it a one-hit wonder?

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research's M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year's largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year.

Recent quarterly deal flow

PeriodDeal volumeDeal value
Q3 2017803$119bn
Q2 2017874$61bn
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

Spending on tech transactions in September hit its highest monthly level since October 2016, coming in twice the average of the previous eight months this year, according to the M&A KnowledgeBase. Yet even with that spike, the value of announced deals so far in 2017 has slumped to the lowest level for the opening nine months of any year since 2014. (The just-completed quarter comes after a particularly light Q2, which recorded the lowest quarterly value of transactions in four years.) At this point in the year over the past three years, tech acquirers, on average, had handed out $360bn – a full $100bn more than the roughly $260bn worth of announced spending so far in 2017.

Go big and stay go home

However, focusing on the top end of the market in September, there's some question about whether the recent momentum for momentous deals will continue through the final quarter of the year. A number of significant prints, including both of Q3's biggest transactions, appear to be uncharacteristically large purchases done under unusual circumstances.

For instance, United Technologies may well buy another multibillion-dollar systems maker, as it did in September's $23bn cash-and-stock acquisition of Rockwell Collins. But its M&A history wouldn't suggest anything is imminent. The M&A KnowledgeBase doesn't have the company doing a deal that meets our criteria of 'tech' since 2011. Or, turning to the second-largest transaction of last quarter, Toshiba wouldn't have put its flash memory unit up for sale if it hadn't been experiencing a cash crunch because of the financial collapse of other Toshiba divisions. And even that contested $17.9bn sale to a consortium of a half-dozen entities isn't certain to go through.

Recent tech M&A activity, monthly

PeriodDeal volumeDeal value
September 2017248$60.8bn
August 2017309$28.9bn
July 2017246$29.3bn
June 2017281$15.2bn
May 2017316$26.6bn
April 2017277$16.6bn
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

Nonetheless, if we annualize spending so far this year, the value of announced deals in full-year 2017 would come in about $350bn. That would represent a dramatic decline from the roughly $500bn spent in 2016 and $600bn in 2015. The number of acquisitions so far this year is also trending lower, with M&A volume in 2017 on pace to drop some 15% compared with the previous two years, according to the M&A KnowledgeBase.

'Every company is a tech company'

The main reason for the recent slowdown in the tech M&A market is that many of the well-known corporate buyers have stepped to the sidelines. Or, as some observers would have it, strategic acquirers have been knocked to the sidelines by the new market leaders, private equity (PE) firms. (We look at PE shops, which printed more tech deals in Q3 than any quarter in history, more fully in a separate section below.) Whatever the cause, the disappearance of the corporate bellwethers, which had put billions of dollars to work in M&A regularly over the years, has left a gigantic void in the tech M&A market.

Nor has their place been completely taken by the nontraditional buyers. A few years ago – when 'every company is a tech company' was a standard, if facile, boardroom talking point – we did see old-line companies in industries such as retail and industrial manufacturing pick up a number of tech assets in headline-grabbing transactions. Yet since those deals tend to be ancillary to the company's core business, these non-tech vendors will never purchase tech providers at the same pace as the established hardware and software giants that have existing commercial relationships with hundreds of thousands of IT buyers.

So yes, Deere & Company may shell out $305m for a tiny, 60-person machine-learning startup to make its tractors smarter, as the machinery manufacturer did in its early-September reach for Blue River Technology. But how many more tech transactions will this 179-year-old company do? The M&A KnowledgeBase has only one other tech deal for Deere & Company, and that printed three years ago. For context, in the intervening period between those two prints from Deere & Company, other acquirers stacked up more than 11,000 tech deals, according to the M&A KnowledgeBase.

Don't count on convention

Companies with long-standing acquisition programs that have seen them buying in both bear and bull markets simply aren't inking transactions like they once were. And that's despite the fact that overall conditions would tend to support shopping. Nearly all US equity markets are at record levels, with the Nasdaq Composite Index having tacked on 20% so far this year. Further, the US economy is growing at a healthy clip, and broadly speaking, the policies and intentions coming out of Washington DC are characterized as more 'business friendly' than they were under the previous administration.

And yet, against this supportive backdrop, tech M&A is dropping. Neither Salesforce nor Oracle put up a single print in Q3. Microsoft announced one acquisition in the middle of the previous quarter, bringing its total number of deals for the year to seven. For comparison, at this point last year, the Redmond, Washington-based giant had purchased 10 companies, including LinkedIn, the largest internet transaction of the past decade and a half. IBM, which used to average roughly an acquisition every month, has slowed its massive M&A machine to a pace in 2017 of one deal every other month.

Dragged down by the lack of action by these and other mainstay corporate buyers, Q3 definitively marked a watershed moment for these NYSE- and Nasdaq-traded acquirers: for the first time in history, the number of tech transactions done by US-listed tech companies actually trailed the number of deals announced by PE firms. Specifically, the M&A KnowledgeBase shows 674 tech acquisitions announced by buyout shops so far in 2017, compared with 661 purchases by vendors listed on the two major US stock exchanges. As recently as 2014, US public companies announced twice the number of tech transactions as their financial rivals.

PE: another year, another record

The prominence of PE firms, which used to occupy only a small piece of the tech M&A landscape, was once again on display in Q3. Buyout shops accounted for nearly three of every 10 tech deals announced last quarter, according to the M&A KnowledgeBase. The 29% 'market share' held by these built-to-transact financial firms is twice the level they held just two years ago. (We looked at the stunning rise of financial acquirers in a special in-depth report published in late August. Part 1 focuses on the larger trends – including some timely shifts in strategy – that have driven the rise of PE shops. Part 2 looks ahead at why we think these financial buyers will continue to outpace their strategic rivals over the next few years.)

In addition to inking an unprecedented number of tech transactions, PE firms have also been buying big. Cash-rich buyout shops accounted for eight of the 20 tech transactions valued at more than $1bn announced over the past three months, according to the M&A KnowledgeBase. Those 10-digit deals from buyout shops covered a stunning array of tech businesses, including a flash memory maker, an infrastructure software giant and a provider of online and mobile payments, among other targets.

With three months of 2017 still remaining, PE firms have already put up more prints than any year in history except 2016. And this year's deal volume will very quickly eclipse last year's, as buyout shops, collectively, have recently been running at an incredible pace of nearly four tech acquisitions every business day. Within a week or two, PE activity will have once again set a record for annual activity – the fifth consecutive record for these new leaders of the tech M&A market.

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