US Technology deals insights: Q3 2019
After a strong first half for the tech M&A landscape, Q3 2019 saw a decline in deal value and volume
Deal value came in significantly lower compared to the prior four quarters, as potential buyers were deterred by political, regulatory, and macroeconomic uncertainties. Similar to the prior quarter, non-tech corporate acquirers were reluctant to enter the market, as tech acquirers accounted for an astounding 94% of corporate tech deals. Q3 2019 deal activity continues to highlight the strength in software, especially companies in the software-as-a-service and security subsectors. Tech IPOs normalized in the quarter after a very strong first half, which was partly driven by the backlog built by the government shutdown earlier in the year.
“While deal activity slowed in the quarter, we are cautiously optimistic that the technology deal environment will recover going into next year, driven by the continued strength of tech acquirers and a significant amount of undeployed capital from private equity investors.”
Tech M&A trends and highlights
- While total deal value in Q3 2019 declined 46% from the second quarter, overall deal value for 2019 is up 37% compared to 2018. This is primarily driven by larger mega deals in 2019 (nine deals for $138B) compared to 2018 (seven deals totalling $63B).
- Q3 2019 also saw a significant decline in deal volume, which was 19% below Q3 2018 and 12% lower than the average quarterly deal volume for the prior three years.
- Foreign acquirers continued to be active in the US market this quarter, with 53 transactions totalling $7.2 billion, compared to 72 transactions with a total of $18.5 billion in Q2. Overall cross-border deal activity through the first three quarters of 2019 is higher compared to 2018, with inbound deal value higher by 8% and outbound deal value higher by 33%.
Highlights of deal activity
Technology M&A sub-sector analysis
Software continued to dominate the tech deals sector with 202 transactions for a total deal value of $28 billion, contributing to 51% of total deal volume and 71% of total deal value. Of the 10 largest technology transactions, seven involved software targets. SaaS and cloud-based companies continued to drive deal activity in the software space, as investors are attracted to the high-visibility and recurring nature of cash flows.
Outside of software, deal activity for IT services companies came in a distant second with 102 transactions for a total deal value of $4.9 billion. Semiconductors, which has been one of the most active sub-sectors over the past several quarters, was relatively quiet, with just seven transactions at a deal value of $3.7 billion, representing a 50% decline from the average of the prior four quarters.
Technology deals outlook
After a strong first half of 2019, deal activity saw a substantial slowdown in the third quarter of 2019, as macroeconomic worries, political uncertainty, and high valuations deterred buyers from pursuing deals. Tech deal activity in Q3 2019 was primarily driven by corporate tech buyers. Deals such as Broadcom’s acquisition of Symantec’s Enterprise Security division, VMware’s acquisition of Pivotal Software and Carbon Black, and Salesforce’s acquisition of Clicksoftware, were primarily driven by a desire to expand the acquirer’s capabilities to differentiate themselves from their competitors, as well as take advantage of revenue synergies from cross-selling their offerings.
While the expectation of a recession will likely deter deal activity in the near term, we expect corporate tech buyers to continue to drive the M&A market in a downturn as lower valuations coupled with a significant availability of capital will spur deal activity from savvy buyers. There is still approximately $2.4 trillion of capital from private equity buyers that will need to be deployed, with US corporations holding another $2.2 trillion.
IPO activity in the third quarter slowed, with 11 IPOs in the tech sector, compared to 22 in the prior quarter, as backlog from the government shutdown resolved. Investors became less eager to invest in fast-growing, but cash-burning tech IPOs, as they saw the lackluster performance of recent unprofitable tech IPOs. Companies, such as WeWork, saw their valuations slashed, as public investors were unwilling to support the prices paid in their latest financing rounds by their private counterparts.
Overall, we expect deal activity to improve going into next year, despite a sluggish third quarter. However, sellers will need to be more realistic of what valuations they can expect to receive for their companies before we see a pick-up in technology deal activity. From an IPO exit perspective, we expect companies that are either profitable or have a path to profitability to outperform their faster growing, but cash burning peers, which will also likely open them up as targets for savvy tech buyers.
About the data
We define M&A activity as mergers and acquisitions where targets are US-based technology companies acquired by either US or foreign acquirers, or targets acquired by US-based technology companies. We define divestitures as the sale of a portion of a company (not a whole entity) by a US-based seller. We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on officially announced transactions, excluding rumored transactions, as provided by Thomson Reuters as of September 30, 2019, and supplemented by additional data from CapitalIQ and our independent research. Information related to previous periods reflects data available at that point in time and is not updated based on new data collected by Thomson Reuters. Unless otherwise noted, all data and charts included in this report are sourced from Thomson Reuters.
Because many technology companies overlap multiple sectors, we believe that the trends within the sectors discussed here are applicable to other sectors as well. Technology sectors used in this report were developed using NAIC codes, with the Semiconductor sector being extracted from semiconductor and other electronic component manufacturing codes with reference to SIC codes. In certain cases, we have reclassified deals regardless of their NAIC or SIC codes to better reflect the nature of the related transaction. For transactions where the buyer and target are in different industries, the announced acquisition is counted in both industry deal reports. To combine deal value or volume across reports, one should eliminate the double-counted deals.
IPOs with deal values that are less than $25mm, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded.
