13 February 2007 — Global mergers and acquisitions (M&A) levels in the technology sector broke through the €100bn barrier in 2006 for the first time since the height of the 2000 M&A boom, driven by resurgent corporate acquisition activity and renewed private equity interest in the sector, according to new analysis by PricewaterhouseCoopers LLP.

Technology Insights reports that 94% of all technology M&A in 2006 were between €10m and €500m, demonstrating that away from the headlines technology M&A is very much a mid-market affair.

Andy Morgan, technology sector leader at PricewaterhouseCoopers LLP corporate finance, has warned that there are challenges ahead for mid-market companies:

“Technology in Europe is primarily a mid-market affair. One of the key challenges facing executives in this strategic battleground is whether to be big or be niche. When companies reach a valuation of €100 million they become much more strategically attractive, and need to decide whether they want to really invest to drive growth — probably through acquisition — or focus on an exit strategy.

“In reality, M&A activity in the heartland of the mid-market (€100–250m deals) has been the one area of consistent growth in the technology sector over the past four years. The return of strategic trade acquirers to the market over the last 18 months has made the temptation of a healthy exit valuation almost irresistible for many shareholders.”

Key findings of the report include:

• Has the technology M&A market peaked?

Despite a marked decline in the last quarter of 2006, the strategic drivers of deal activity still remain. Mega deals continue to be a feature within the technology sector with 18 €1bn-plus deals in 2006 (14 in 2005). Alcatel’s €11.1bn acquisition of Lucent Technologies topped 2005’s largest deal, the private equity-led acquisition of Sungard Data Systems by €2.4bn. PricewaterhouseCoopers expects strong M&A performance to continue at least through the first half of 2007, driven by the weight of available private equity funds, and a continued strong corporate appetite for both infill and transformational deals.

• Here comes India

Total deal volumes between Europe (including the UK) and Asia rose by 167% in 2006. A landmark deal was the €113m acquisition of the UK’s Azure Solutions by India’s Subex Systems, signalling the end of the window shopping era and the arrival of the sub-continent as serious players in the M&A game in Europe. In 2006, many Western European players looked to Asia. Notable deals included the €93m acquisition of the Chinese router business Harbour Networks by Siemens and the €21m acquisition in Malaysia of UBS Corporation Berhad, by the UK’s Sage Group. This uplift in activity is set to continue.

• Private equity interest increases in the UK

While private equity played another strong hand globally in the technology sector in 2006, the increasingly aggressive approach of strategic trade acquirers is posing real competition to the private equity houses. The UK experience was different with the private equity market rediscovering its appetite for software and IT services — attracted by the cash generation potential of emerging business models and the buy and build opportunities. Four of the top six acquisitions of UK technology companies were leveraged deals in 2006, a stark contrast to 2005 when the UK private equity industry failed to score a single top ten deal.

• Old world versus new world

While the headlines are dominated by the forays of the “New World” technology stocks, it is the “Old World” players that appear to be the real driving force. Oracle and IBM invested a combined €8.7bn on eight disclosed acquisitions in 2006. In comparison, the spending of the “new world”, including Google and eBay, was relatively muted at some €1.4bn.

• Phase two consolidation sees structural realignment

Deal valuation metrics in the Software and IT services (SITS) sector increased progressively in 2006. The PricewaterhouseCoopers SITS Valuation Index has increased by more than 12% over the last three years, and demonstrated a very strong positive correlation with deal volumes.

The industry has now firmly moved through phase two consolidation as the leading players tackle a rapidly evolving landscape, fuelled by convergence, new delivery platforms and the challenges of building and delivering new services and accessing less familiar markets. This structural re-alignment has been characterised by the significant upturn in valuations and the step change in total deal values experienced in 2005 and 2006 against a background of flat deal volumes.

Andy Morgan, technology sector leader at PricewaterhouseCoopers LLP corporate finance, comments:

“The balance of power in phase one consolidation was firmly with the buyers, with lower valuations and limited alternative options for vendors. For quality assets, the balance of power has swung firmly back to vendors now we are in phase two.”

• SITS continues to dominate technology M&A

Software and IT services (SITS) remained the source of most M&A activity in 2006 accounting for 66% of all global deals. Software had the most activity accounting for 63% of all SITS transactions. However, aggregate deal value for the software market actually decreased slightly to €36 billion (€44 billion in 2005).

For 2007, Technology Insights also predicts:

• Asia, specifically India, will continue to rise in importance on the global technology M&A stage particularly in Europe. China will slowly continue to exert more influence on transactions, both as a buyer and seller, but it is unlikely there will be a material shift in 2007.
• The significant level of investment to date in environmentally and energy efficient technologies, such as fuel cells, energy efficient displays, biometric recognition and alternative lighting, is increasingly being rewarded by the evolution of these technologies into practical, cost effective and reliable end-user solutions. PricewaterhouseCoopers expect increased M&A activity in this space, as corporates look to adopt such technologies into their offering as demanded by a more environmentally-aware customer base.
• The progressive move towards a web-based Software as a Service (SaaS) model is likely to stimulate more SITS M&A deals in 2007 as software becomes more 'modular', allowing niche acquisitions to be integrated seamlessly into the wider corporate offering.

Notes to Editor:

1. About PricewaterhouseCoopers Corporate Finance

   The Corporate Finance teams within the member firms of PricewaterhouseCoopers International Limited have more than 800 corporate finance specialists in more than 60 offices in key centres throughout the world.

   In 2006, PricewaterhouseCoopers International Limited advised on over 350 M&A deals globally, valued at over $43 billion. Services include advice on acquisitions, disposals, private equity transactions, privatisation, corporate and project finance. Industry teams include Energy and Utilities, Business Services, Consumer Products, Financial Services, Industrial Products, Pharmaceutical & Healthcare and Technology, Media and Telecoms.

   According to Thomson Financial, PricewaterhouseCoopers is the UK's leading M&A adviser for transactions between $50m and $500m, having advised on a higher volume and value of mid-market deals than any other adviser in the UK between 2002 and 2006.

2. The member firms of the PricewaterhouseCoopers network provide industry focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network work collaboratively using connected thinking to develop fresh perspectives and practical advice.

   Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP a limited liability partnership incorporated in England. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.

PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.