August 1, 2011

Panic Never Pays

Ash Sethi – Analyst, MergerTech Advisors

For several years now, it seems that most news pundits and Wall Street analysts are competing to see who can be the most bearish on the US economy.  Poor unemployment data, spirited competition from emerging overseas economies, and continuous bickering in Washington over growth in the national debt contribute to a picture of markets suffering various long term crises.  These perceptions of present or future weakness in the economy can affect the choices of those looking to buy or sell a company, and not always for the better.  Parties on either side of an M&A transaction sometimes miss good purchasing or selling opportunities because they panic and think that better deal value can be realized by moving at a later date.

It is worth noting that despite these economic uncertainties technology M&A deal volume is up 32% from Q2 2010.  So why does tech have a hiring boom while automakers are reducing headcount and airlines are going bankrupt?  Inherently in the technology space are cross-market synergies which drive rapid growth and make firms attractive targets for strategic acquisition.  For example, proliferation of smart phones and tablet devices has created potent demand for services in mobile marketing, gaming, IT security, social media, telecommunications, and software spaces.  The convenience of high quality digital downloads of video media as opposed to DVDs have been a boon to providers of broadband and cloud storage services.  When one technology sector grows, others typically grow with them.  By nature, technology companies are continuously seeking to upgrade existing offerings while simultaneously working to make them obsolete by developing entirely new products.

Even non-technology oriented businesses like hotel chains and apparel makers are discovering that app development and a presence in social media spaces are now integral parts of winning marketing strategies.  Competition to acquire companies is driving up both M&A opportunities and sale prices for technology firms.  In short, technology is becoming a part of every business space, and that presents huge opportunities for M&A activity that bucks medium term macroeconomic trends.  Non-technology firms sometimes struggle with developing or contracting out technology processes, particularly those that are highly dependent on strong user experience (UX), and conclude it is better to acquire an existing team and bring them in house.

From time to time markets experience boom phases or undergo distress, but over the long term the American economy tends to be fairly stable and mean reverting.  So while politicians will continue to argue and enormous fiscal challenges lay ahead, good tech talent is and will continue to be in high demand.  Don’t pass on a good M&A opportunity when it presents itself to you.    Our analysis and data show that the technology M&A market has recovered extremely well from the low points of the recession and both the number of deals and the price at which they are getting done are providing excellent opportunities to convert work into wealth for company founders and shareholders.