After some turbulent times two years ago, we are starting to see real growth in M&A activity in the technology sector. James Klein of Penningtons Solicitors LLP looks at the latest trends and what we can expect as confidence in the market returns.

Until the first quarter of 2009, deal activity for the technology sector had seen eight consecutive negative quarters. Since then, however, M&A activity has started to thrive again.  According to recent Ernst & Young Global Technology M&A Updates, deal count during 2010 totalled 2,658 (up 41%), returning to levels last seen in 2008, with a total deal value of id="mce_marker"19bn (up 26% on the previous year). During 2011 deal numbers have continued to grow.

The contribution made by British companies to these figures has been increasing. Britain ranked as the second most technology-acquisitive country in the world during 2010, eclipsed only by the US.   During 2010, M&A activity in the UK technology sector rose by around 50%.

There has been a recent shift towards smaller, more strategically focused deals, particularly in the areas of smart mobile technology, software as a service (SaaS), internet and mobile video, cloud computing and social networking.  The top 10 deals of Q1 2011 were dominated by smart mobility and cloud computing, although three semiconductor deals also featured.  A cross-sector blur is evident, as new technologies cross traditional sector lines.

There has also been a change in deal dynamics.  The top 25 companies in the sector command between them over $500bn of cash and investments, and we are seeing more pre-emptive deals, as buyers actively seek out strategic investments. As exit opportunities improve, we have also witnessed the return of private equity, with private equity deal value reaching id="mce_marker"9.7bn in 2010, more than double the 2009 total ($9.8bn).

Technology companies are capitalising on the wealth of innovation in the market, by using their cash reserves to broaden product portfolios and integrate capabilities to draw client spending.  As cost-cutting measures have run their course, M&A often remains the only way to grow earnings in future markets.

In the UK, an emerging trend is the increase in e-commerce transactions, with several high profile sales this year, (for example Amazon’s acquisition of Lovefilm).  Larger overseas corporates are active: in May 2011 UK-based TweetDeck was bought by Twitter for £25 million, and Misys and MicroFocus, two of the UK’s biggest tech players, are both in discussions with potential purchasers.

Despite the optimism, both financial and strategic buyers should remember that thorough due diligence and timely integration planning are essential for a successful technology merger. 

James Klein is a partner in Penningtons' corporate team and a member of the firm's technology sector group.

James Klein
james.klein@penningtons.co.uk
www.penningtons.co.uk