Stuart Marcy and Brad Adams of M&A International Inc. reflect on a remarkable year for international M&A activity.
Despite concerns over some macroeconomic indicators, strategic acquirers, fuelled by strong corporate profits and aggressive private equity buyers, continue to propel the M&A market. With deal volume of more than $2.7trn to date, 2007 is on pace to be the most active M&A year in history. Although some commentators are beginning to predict a cooling-off period, we believe there is still plenty of impetus behind the wave of consolidation.
Based on our experience within M&A International Inc. (MAI), the global alliance of mid-market corporate finance advisers, the M&A mid-market is clearly thriving and becoming more internationally focused. We are seeing buyers and sellers considering both domestic and cross-border opportunities as a matter of course. In particular, we expect to see further consolidation in the technology sector, which has become a truly international market.
Technology Bubbling
The technology sector has been hyperactive during 2007. M&A soared to new levels, totalling 1,424 transactions, with an aggregate deal value of $158.6bn for the first half of the year (Source: Capital IQ). We believe that more mature markets, increased cash flows and longer-term, reliable revenue streams are the key factors driving interest from financial acquirers, as well as traditional corporate acquirers.
In the second quarter alone, we tracked 322 technology-based M&A transactions, amassing $38.2bn in aggregate deal value (based on 133 reported deals). Sector activity in the second quarter mirrored the first quarter, but with a slight decrease in aggregate volume. Much of this decrease in volume can be attributed to a greater emphasis on integration following the acquisition spree of the past 18 to 24 months, while the increases in deal value can be attributed to the flurry of large private equity transactions.
Large global buyers remain active in searching for middle-market acquisitions that can add capability and/or help build an international presence. Many of our sellside assignments have generated multiple offers at very strong valuations – a sure sign that the M&A market remains healthy.
However, according to our technology specialists in the US, while M&A activity in the technology middle market remains robust, there is a scarcity of high-quality targets in certain specialist market segments. These sectors have undergone significant consolidation in the past two years, leaving very few middle-market players available for acquisition.
Crossing Borders
M&A activity in the technology sector is increasingly international, with almost 50% of all transactions having a cross-border element. A large proportion of this activity is between the US and Europe. As the technology market continues to mature and consolidate, we believe that the growth in cross-border deals will continue, with buyers and sellers from around the world looking beyond their domestic markets. Within MAI we have a robust pipeline of cross-border opportunities that should close in the next six months.
It is clear to see why cross-border M&A has become more attractive with the harmonising effects of globalisation. IT capacity allows seamless communication between offices and there is a glut of financing options. Competitive local markets, especially in the US and UK, have forced private equity houses and trade buyers to capitalise on the wealth of family and privately owned mid-market businesses outside their domestic markets to generate interesting investment opportunities.
Private Equity’s Growing Appetite
The deep pockets of private equity buyers have consistently grabbed the headlines this year, with one multi-billion dollar acquisition after another. These private equity buyers are now major players in the technology space. We have seen tremendous interest from private equity buyers in many technology M&A opportunities, whereas previously they have rarely appeared on potential buyers’ lists. In the first half of 2007, MAI observed 29 private equity backed transactions in the technology sector, totalling $55.5bn. Private equity buyers have impacted the market significantly and made it increasingly challenging for strategic acquirers to compete for solid acquisition targets in certain sectors.
Outlook
Although investors are flush with cash, industry pundits have been quietly comparing the massive amounts of cheap debt issued to fund these buy-outs with the sub-prime mortgage problems in the US economy. There is a fear that despite the ‘covenant lite’ terms of the loans issued by many lenders, a credit crunch could have a detrimental impact on many of these highly leveraged companies.
However, MAI remains extremely active and, given underlying market conditions, optimistic growth predictions for the technology sector and the fact that private equity buyers need to deploy capital, we do not believe private equity players will slow down their aggressive acquisition pace during the remainder of 2007.
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