Stock Market Volatility is a Key Driver of Surging M&A Activity in Technology Sector, Finds Report by Broadview Associates
Business Wire - January 21, 1998 07:16
NEW YORK--(BUSINESS WIRE)--Jan. 21, 1998--
-- Total number of M&A transactions in IT, media and communications industries climbs 25% globally and 31% in North America to new levels, according to Broadview Associates' 1997 Technology M&A Report
-- The number of public company sellers jumps 57% in 1997; in the software sector, the number of public sellers leaps by 83%
-- Privately-owned tech companies choose M&A route over IPO by a ratio of 8:1 in 1997, up from a 4:1 ratio in 1996
-- The number of non-tech buyers for tech companies, including financial investors and management-led buyouts, rises 28% in 1997
The worldwide number of merger and acquisition (M&A) transactions in the technology industry reached a record 4,040 in 1997, 25% more than the 3,224 transactions completed in 1996, according to the 1997 Technology M&A Report from Broadview Associates, a leading M&A Investment Bank serving the IT, media and communications industries. Total consideration increased 17%, from $207.2 billion in 1996 to $242.8 billion in 1997, the report said. "U.S. buyers extended their dominance of global tech M&A activity, representing two-thirds of worldwide acquirers of tech companies in 1997," said Paul Deninger, Chairman and CEO of Broadview Associates. "This trend is highlighted in the European M&A market, where U.S. buyers increased their share from 22% of all European deals in 1996 to 26% in 1997, and for the first time, overtook the United Kingdom as the leading acquirer in Europe." In North America, the number of M&A transactions rose 31%, from 1,962 in 1996 to 2,577 in 1997, while total consideration increased 10%, from $144.4 billion in 1996 to $159.3 billion in 1997, according to the Broadview report. (In 1996, three large transactions accounted for $50.9 billion or 35% of the transaction value that year.) The number of public company sellers rose by a dramatic 57% in 1997. In the software sector, the public company sellers rose by an eye-opening 83%. "Many public companies are finding that the IPO route has not met their expectations," said Deninger. "The record number of public offerings in recent years flooded the market with technology companies. These companies now often find themselves competing for the attention of analysts -- and without adequate coverage, their performance lags. More than half of all publicly-traded tech companies today went public in the last four years, yet nearly a quarter of them have no research coverage. These days Wall Street has little patience -- a newly public company that fails to meet expectations one quarter can quickly fall out of favor." Rather than risking the uncertainty of the IPO route, an increasing number of privately-held tech companies are using M&A transactions as their preferred vehicle for accessing capital and technology, Deninger notes. The Broadview study finds that for every one company that went public in 1997, eight others opted for merger or acquisition. The year before, for every one company that went public, only four others opted for the M&A route. "These developing companies face enormous distribution challenges in an increasingly competitive marketplace." Deninger said. "At the same time, there are larger, well-capitalized companies that need new technology and must quickly deliver fully integrated solutions to their customers. Larger merger partners can offer private companies attractive, strategically based value and opportunities for growth without the risk of the IPO market. A lot of these M&A transactions are clear win-wins." Interestingly, financial buyers and management-led buyouts account for more technology company acquisitions than ever before. In 1997, 73 acquisitions of technology companies were completed by financial buyers, up from 57 such acquisitions in 1996 -- a 28% increase, according to the Broadview report. "Financial buyers see opportunities in the technology sector," Deninger said. "There are tech companies out there that are undervalued, that perhaps need to be re-focused and re-capitalized, but offer good long-term performance with the right team in place. Now that technology is such a huge part of the GNP, this is going to happen more frequently, especially in segments where technological obsolescence is less of an issue."
Trend Toward "One-Stop Shopping" Doubles Median Deal Size In Telecommunications Sector
Similar to 1996, which was dominated by three mega-deals (Bell Atlantic/Nynex, SBC/Pacific Telesis and WorldCom/MFS Communications), 1997 saw a continued trend toward telecommunications companies offering their customers a "one-stop shopping" source for local telephone, cellular, long distance, Internet and intranet services. In 1997, telecommunications transactions grew by a strong 33% to 381 compared with 287 transactions in 1996. Total consideration for telecommunications M&A fell 14% to $59.3 billion in 1997 from a record high of $69.1 billion in 1996, an unusual year where three mega-transactions accounted for nearly 74% of the transaction value in telecommunications M&A. In 1997, the telecommunications sector recorded the largest M&A transaction in all of corporate history, with the pending $37 billion acquisition of MCI by WorldCom. WorldCom also announced its intent to acquire Brooks Fiber Properties, a provider of local communications service, for $2.1 billion. In another major transaction, Century Telephone Enterprises acquired Pacific Telecom, a provider of local exchange and cellular telecommunications services for $1.5 billion. "As a sign that the telecommunications market is trending toward market concentration, we have seen a sharp rise in the median transaction size for telecommunications acquisitions, which nearly doubled from $15 million in 1996 to $29 million in 1997," Deninger noted. "While deregulation has opened the gates for continued consolidation among telecommunications companies, the 'door' will not be fully open until all companies can freely compete in each other's markets," according to Deninger. "Those telecommunications firms that are striving to achieve critical mass across local, long distance and cellular markets -- as reflected by WorldCom's multiple acquisitions, AT&T's announced acquisition of TelePort and SBC's announced takeover of SNET -- could be the winners."
Build-Out of Information Highway and Defense Industry Consolidation Drive Hardware Products M&A to 79% Growth in Transaction Value
M&A activity in the hardware sector in 1997 was driven by bigger deals resulting from the continued build-out of the information highway and the consolidation in the defense industry. Total consideration for hardware transactions in 1997 rose to a record $48.8 billion, an increase of 79% over the $27.3 billion in transaction value recorded in 1996. Transactions in this sector grew by 25% to 389 compared with 310 transactions in 1996. "The information highway is still a single-lane road for many consumers and businesses," Deninger said. Hardware and telecommunications companies are developing technologies and building the infrastructure to facilitate convergence of voice, data and video, and to provide the necessary bandwidth for higher quality content distribution. "3COM, Ascend and Lucent all made acquisitions to bolster existing product lines in communications hardware in 1997," according to Deninger. "These transactions have long term strategic value to the acquirer as they seek to build broader capabilities for integrating voice and data communications. Meanwhile, Compaq's takeover of Tandem Computers gave them a new product line to lessen their dependency on the PC and extend their position at the core of enterprise computing." Deninger continued, "Raytheon's acquisitions of Hughes Electronics' and Texas Instruments' defense electronics businesses were pure consolidation plays to ensure them a bigger piece of a rapidly-shrinking defense spending pie."
Shake-Out Among Public Software Companies
The buoyant software products & services sector continued to represent one out of every three M&A transactions in 1997, with an astonishing number of publicly-held software companies seeking merger partners. Software M&A also saw a growing appetite by financial buyers for software companies. Overall, software M&A transactions were up 30% from 1996, while the value of these transactions rose 36%. The number of acquisitions of privately-held software companies increased by 36% to 678 transactions, while the number of software companies going public in 1997 declined by 38% to only 80 IPOs in 1997. There was an increase of 83% over 1996 in the number of publicly held software companies that were sold in their entirety. Twenty-two acquisitions were led by equity and buyout funds including some first time players. The most notable acquisitions by financial buyers included Welsh Carson's takeover of Control Data Systems; Thayer Capital's buyout of SOFTWARE AG Americas; and Platinum Equity's purchase of DAVID Corp., DCA and Pilot Software. "The whole software sector is undergoing a Darwinian evolution as evidenced by the record number of publicly-traded companies sold last year," Deninger said. "At the same time, the number of private software company sellers continues to climb each year as many private companies recognize that the M&A path offers them longer term prospects for growth and financial stability. "IBM's acquisition of Software Artistry was one of the year's most interesting transactions -- sending a message to its competitors and the industry as a whole that, coupled with IBM's acquisition of Unison, the company intends to build its systems software capabilities in its battle with Computer Associates, Sterling Software, BMC, Oracle and Hewlett-Packard," Deninger pointed out. "The stock market's reaction to the Software Artistry transaction was swift and painful to some of the company's competitors. Small niche markets can only support a few players, and when a consolidator steps in, the playing field shifts dramatically."
Media Sector Shows Strongest M&A Growth
The media and information services sector had the highest M&A growth rate with 525 transactions in 1997, an increase of 47% over 1996. Total deal consideration fell 17% from $21.4 billion in 1996 to $17.8 billion in 1997 as a result of fewer multi-billion dollar deals, despite the almost doubling of transactions. "The media sector will continue to be hot," said Deninger, "as traditional media companies strive to consolidate their positions and simultaneously expand into digital distribution of content. New media companies that facilitate digital distribution or serve as an engine for electronic commerce will stay in demand." "If 1996 was the year of the Internet IPO, 1997 saw a cooling off in the media sector with the number of media IPOs dropping by 52%," Deninger continued. "As the Internet infrastructure is built out to handle the convergence of voice, data and video, we should see an acceleration in M&A and public market activity in the media sector." Broadview Associates is a leading M&A investment bank serving the IT, communications and media industries. The firm focuses on advising companies on mergers and acquisitions, restructurings and financings. Through a global network of nearly 200 employees operating across the United States, Europe, Asia and Israel, Broadview assists clients in evaluating available strategic options, defining key business issues related to value, and expertly executing transactions. Recent transactions the firm has completed include Matrixx Marketing (a sub of Cincinnati Bell)/American Transtech (a sub of AT&T), Software Artistry/Tivoli (a subsidiary of IBM), Axent/Raptor, DSC/Celcore and Peter Chadwick/Cambridge Technology. Broadview's 1997 Technology M&A Report reflects data extracted from the firm's comprehensive merger and acquisition database. The data is based on transactions announced in 1995, 1996 and 1997, and includes the most current information available. The report incorporates revised data to reflect final transaction valuation or unexpected termination of transactions, as well as the reclassification of transactions in converging and expanding industry segments. For detailed analysis of European transactions or to find out more about Broadview Associates, visit the firm's web site at www.broadview.com. |
