2016 was an amazing year for mergers and acquisitions, especially in the technology sector. In tech, it was the highest M&A activity we have seen in north America in the last 15+ years. We believe many of the factors that drove this strong performance are in place to make sure 2017 is just as strong, if not better. In this blog, we will highlight some of these trends from 2016 and discuss why we think everything is in place for a very robust 2017.
Review of 2016 Activity
Let’s start by looking at tech M&A over the last five years. As you can see from Figure 1 below, tech M&A ended 2016 at $484.5bn a considerable increase over the $185.1bn in 2015. While the number of deals were down from over 2.2k in 2015 to just under 1.9k in 2016, this is a level that is more consistent with what we have seen in the 2012-2014 period.
Figure 1: Tech M&A Volume by year (U.S. and Canada)*
This spike was obviously in large part driven by some of the mega deals like Time Warner / AT&T ($85bn), TW Cable / AT&T ($79bn) and Broadcom / Avago ($37bn) but it was also driven by an overall increase in valuations that can be seen in Figure 2 below - showing there was an increase in the average TEV / Revenue multiple from 1.9x in 2015 to 2.4x in 2016.
Figure 2: Median Tech M&A TEV/Revenue Multiples (x)*
Within industries there is the typical variation, with Internet and Software at the high end of the range (2.8x and 3.8x median, respectively) and IT Services on the low-end (1.4x median). This is illustrated in Figure 3 which also shows the top and bottom 25 percentiles.
Figure 3: Multiples by Tech Sub-Sector (x)*
So where does this all leave us for 2017?
For 2017, we expect an extremely strong year for M&A backed by several macro trends:
- Cash balances are at all time highs: The S&P500 (ex-financials) cash balance grew 7.6% in 3Q16 to over $1.5 trillion, representing the largest cash total in at least 10 years (Source: FactSet). Many tech companies top the list with Microsoft and Alphabet having the largest cash balances at $137bn and $83bn, respectively. This is a huge amount of cash that is earning close to zero return and these companies are facing increasing pressure to deploy the capital or return it to shareholders.
- Organic growth is slowing: While cash balances grew 7.6% QoQ, LTM revenue growth for the S&P500 was -0.6% (Source: CapIQ). With organic growth slowing at large-cap companies, they are increasingly looking to M&A to supplement growth.
- Additional near-term stimulus in the US: There’s a couple of fiscal measures that should be positive for M&A as a result of the recent election result. Lower corporate and personal taxes combined with stimulus spending expected on infrastructure projects should fuel economic growth in the US and creating a positive backdrop for M&A activity.
- Acquirers valuations remain robust: If overall economic growth continues in the US, potential acquirers should be rewarded by stock prices staying at or exceeding current levels. High relative stock prices has typically fueled merger activity as acquirers use more of their stock in potential acquisitions.
- Debt funding remains cheap: While interest rates are likely to be on the rise in the US throughout 2017, debt funding is likely to remain very attractive, especially for investment grade tech acquirers.
2017 is going to be exciting for sure and we look forward to continuing to help our clients navigate through these exciting times!
About the author
Ed Bryant is the President and CEO of Sampford Advisors. Ed started Sampford because he wanted to provide world-class M&A advisory services to Canadian technology companies. Ed has over 20 years of experience including over 17 years in Investment Banking with Deutsche Bank, Morgan Stanley and Sampford in Hong Kong, Singapore, New York and now Ottawa. In that time, Ed has raised in excess of $20 billion in equity and debt capital and completed over $10 billion in M&A transactions.
Visit us at www.sampfordadvisors.com.
* Source: Pitchbook.
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