Tech deals dominating wider M&A landscape
We are living in an era of unprecedented technological change and development, in which technology has moved from the back office to become a key business enabler and a driver of competitive advantage.
Driven by relentless innovation and on advancements in areas such as cloud computing, Artificial Intelligence and automation – to name but a few – the global technology industry has been consistently growing at about 5% a year. This compares with average global GDP growth of less than 3% since 2010.
As a relative bright spot in an otherwise lacklustre economy, the tech sector has naturally become a crucial source of merger and acquisitions activity. According to the Institute of Mergers, Acquisitions and Alliances (IMAA), since 1985 the global High-Technology market has generated 118,000 deals, with a combined value of $5 trillion. Only industrial companies have generated more.
If incumbent technology firms have traditionally been the main driver of M&A activity (Google alone has made more than 200 acquisitions since 1998), we are increasingly seeing a trend towards cross-sector deals involving other sectors. Of the ten largest technology deals taking place worldwide in H1 2017, only four involved two industry incumbents.
In many industries, technology acquisitions are becoming a vital conduit for innovation and a way of gaining an edge over rivals. This is particularly true in the financial services sector: an April 2017 survey found that nearly one in three banks and asset managers had ambitions to buy a financial technology (FinTech) firm during the subsequent 18 months.
In the UK, tech deals are beginning to dominate the wider M&A landscape. According to Pitch Book, an M&A data provider, technology-focused transactions comprised 18.6% of total deal activity during 1H 2017, up from 15.9% in 2016, with 1,538 deals completed by the midpoint of the year.
Significantly, Private Equity (PE) firms accounted for around 30% of all tech deals during this period, the highest proportion since 2010. Meanwhile, the median deal value of UK technology M&A transactions has been falling, suggesting a growing interest in small and mid-tier firms.
With sluggish growth expected to persist in the UK and elsewhere, technology companies will continue to sit high on acquirer shopping lists. The competition for quality opportunities is only likely to intensify.