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.