Technology M&A — Turbulent Waters Ahead

November 11th, 2011
MMM Tech Perspectives

At the October 18th meeting of the Technology Executives Roundtable, Alec Ellison of the investment banking firm Jefferies & Company provided insightful comments and predictions regarding the M&A and IPO markets for tech companies in 2012.

Alec is the Vice Chairman of Jefferies and Chair of the Technology Group for this leading investment bank. He has been a friend of our Atlanta technology community for decades and kindly shared his illuminating observations and predictions at the October 18th breakfast meeting of TER. Her are a few of his salient observations:

1. What are the information megatrends driving the M&A market?

Mobile, search and video, cloud computing and millennials (anyone born after 1980 in the workplace)

2. What’s driving the road of M&A?

Venture capitalists and private equity firms need exits for their portfolio companies. M&A provides the only realistic path to liquidity.

3. Why can’t the venture and private equity funds simply wait on the sidelines until market conditions improve before liquidating portions of their portfolio?

Many venture and private equity funds have been holding their investments in portfolio companies for several years, and these funds must liquidate their holdings in order to move on to raise new capital in their next fund.

4. What’s motivating corporations to be strategic buyers in this M&A market?

Corporate growth rates have slowed meaning that acquisitions are necessary for corporations to hit growth targets. Also, many corporations have significant cash holdings to fund strategic acquisitions.

5. What’s motivating technology companies to sell in this market?

Many sellers are anticipating capital gains tax increases thus making a current sale more attractive. Also, the heavy cost of keeping up with dynamic technology changes make it more attractive to affiliate with a strategic buyer.

6. How significant are the venture capital funded companies in leading the increase in M&A activity?

VC-backed sellers accounted for 78% of private sales greater than $150 million in Q2 2011. The trend is expected to continue through the end of the year.

7. What is the current state of the IPO market for technology companies?

It has been 10 years since the tech bubble burst and our current IPO market is not even close to pre-bubble levels. The hurdle to become a public company has become much greater in terms of the size and financial condition of a company that is a candidate for an IPO.

8. What are the factors behind the slow growth of the IPO market?

Dodd Frank laws; decimalization, and Regulation FD (the full disclosure regulation).

9. How many IPOs have priced in the second quarter?

Only one IPO has become effective in Q2 and its price was below the projected opening price range.

10. What are the key factors driving premium valuations in the M&A market?

The size of the Total Available Market (TAM) — so companies like Google, HomeAway and LinkedIn are attractive because of the enormous prospective customer base. Also, the current technology trends driving growth are mobile, global, social, cloud and video.

11. What is the basis for the heightened valuations given to the social media companies like Google and LinkedIn?

Unit economics or lifetime value of a customer — subscribers to social media sights are expected to be long-term customers providing a steady revenue base for an extended period of time.

12. What are the predictions for M&A and corporate finance growth in the technology markets?

• The bar for IPOs is unlikely to decline, even in a robust market
• Strategic buyers will continue to trump financial buyers
• Global economic policy decisions will have a major impact on capital markets

This summary is presented for educational and informational purposes and is not intended to constitute legal or financial advice.