Tech Deal Flow

There has been increased amount of Tech M&A deal flow since the beginning of the year -- $86 billion in the first quarter, and $63 billion in the second quarter. 2010 also saw a huge deal flow with acquisitions totaling almost $168 billion and since the beginning of last year, we have seen some of the largest tech M&A deals in history.

2011 was marked by two high-profile deals including Microsoft's announcement to acquire Skype for $8.5B and Texas Instrument's $6.5B bid for National Semiconductor. Other notable deals include Qualcomm's $3.1B acquisition of Atheros, eBay's $2.2B acquisition of GSI Commerce. The IPO market also saw lot of activity with several social-media IPOs including Linkedin, Pandora, Renren and flash-storage component provider Fusion IO already reaching multi-billion dollar valuations and several others (Groupon, Zynga) filing their S-1. The increased IPO activity boded well for the M&A market, since it showed increased investor confidence in the tech sector.

The year 2010 started with the closing of Oracle's $7.4B acquisition of Sun Microsystems. Through the rest of the year there were other key M&A announcements including $7.7B acquisition of McAfee by Intel, HP's $2.4B acquisition of 3PAR after a huge bidding war with Dell, HP's other billion+ dollar acquisitions of ArcSight, and Palm, EMC's $2.25B all-cash acquisition of Isilon, IBM's $1.7B purchase of data-warehousing company Netezza.

Tech M&A activities in the second half of 2011 is yet to be seen. There are speculations of a double-dip recession, and the stock prices are falling across the board, showing reduced investor confidence in capital markets. IPO activities, as a result, might slow down a bit, because companies might decide to wait till the market returns to normalcy, before filing for IPO. However, there are several factors, which makes me feel that M&A activities are still going to continue:

• Technology companies still have huge amounts of cash sitting on their balance sheets. The 10 largest companies are sitting on a combined cash and marketable securities of approximately $300 B!!! They either need to return that money to shareholders or invest in companies to augment their products and services. I feel it will be more of the latter.
• Venture funding is not slowing down -- according to CB Insights Q1 and Q2 2011 saw a venture funding volume of $7.5B and $7.6B respectively, and the year 2010 had a volume of approximately $24B of venture funding -- implying that there are more and more innovative companies either coming into market, or receiving further capital infusion.
• Increased competition is forcing companies to realize that the key to success is to expand their product portfolios quickly through acquisitions into adjacent markets.

Together this means that there is good supply of innovative companies, a pent-up demand for them and resources available to acquire them. So whether there are billion dollar deals or below-HSR ones, or somewhere in between, M&A activities in the tech sector is going to have to continue.

Analytics: Sweetspot for Tech M&A

If I were to invest in a tech company today, it would definitely have to have an advanced-analytics story. ... Why? ... Well, firstly, with the recent announcement of IBM to invest both money and resources in research for analytics & big data projects; secondly, with research indicating that location analytics is going to be a $9 billion market within a few years; and thirdly, with a number of small and big companies (including IBM, EMC, Microsoft and others) focusing on either developing or supporting Hadoop-based or similar analytics products and solutions, I feel that there is a lot of attention on advanced analytics and data management space by investors, small, and big companies, and, therefore, it clearly lies in the sweetspot of technology M&A activities in the coming few years.

Now what is 'advanced analytics' ? Well, for the past decade we have, among various other things, generated and collected astronomical amounts of data -- end-user behavior data, business data, demographic data, social interaction data and so on -- using different Internet tools, social-media websites and other means. Now this astronomical amount of data, most of which is unstructured, needs to be turned into something meaningful and actionable. That is essentially, what our focus has currently turned to -- i.e. being able to make some sense out of all that data by analyzing them and more importantly generating some actionable insights out of them. One important distinction that I would like to draw here is that 'analytics' is very different from 'reporting', although a lot of companies like to use the term analytics to refer to a reporting tool that they might offer. Reporting only presents data in a meaningful form, something which traditional Business Intelligence (BI) companies used to do. 'Analytics', on the other hand, analyzes data and makes it actionable for its users. In other words, if you are reading this blog, I can tell from the statistics that I collect (not that I collect any readership statistics), how many readers have read this blog before you -- that is reporting. What I cannot tell, however, from that data is how can I increase the readership of my blog -- that is what analytics should give me. Clearly, whether you talk to consumer Internet sites, media companies, businesses or social-media companies like Facebook, Twitter or Linkedin, one of the big things in their minds, today, is how to take some meaningful actions based on their user data, including of course, how to do very targeted advertising.

Several recent relevant acquisitions highlight the importance of advanced analytics and data management:

-- HP's Acquisition of Vertica, a real-time analytics platform company.
-- Teradata's acquisition of Aster Data, again a real-time analytics technology provider.
-- Google's acquisition of PostRank, aiming to make sense of social engagement data.
-- IBM's $1.7 billion acquisition of Netezza, although more in the data warehousing and business intelligence space, clearly shows the amount of $ being spent in analytics related acquisitions. Other IBM's acquisitions of Coremetrics, Unica, and other analytics companies. In fact, over the past few years IBM has invested $12 billion in 23 or so analytics-related acquisitions.

-- Same is the case with EMC's acquisition of Greenplum, which is more of a data warehousing, BI play. However, using the acquisition, EMC recently announced a Hadoop-based appliance meant for data co-processing. Interesting..Huh!

Other smaller M&A activities include ePrize, a marketing campaign company, acquiring CRM division of Apollo Data Management, which although seemingly unrelated is actually a predictive analytics play, Adenyo acquisition of Arizona-based KinectX, again a small acquisition in the predictive analytics space, and Twitter recent announcement of its plans of acquiring Tweetdeck, in an attempt to make sense of their user data.

Several other companies, like Datameer, Xobni, Zettaset, Datastax and others have raised or are raising millions of venture dollars and are coming up with innovative analytics products and solutions.

So it looks like there is significant money & resources flowing into the analytics space by investors and deep-pocketed companies alike. At the same time, there is market demand for advanced analytics products from all corners of the Internet, by companies clamoring to make advertising dollars from their user data. Therefore, there is focus and attention on the analytics space and, as a result, a spate of analytics acquisitions is clearly on the cards.