Down To Business: The New Reality Of Tech Industry Consolidation
New companies, including ones from outside IT, are getting into the tech M&A mix as the modest recovery accelerates deal-making.
Amid a recovering economy, technology merger and acquisition activity took off in 2010, as the number of deals and total deal value hit their highest levels since 2007, according to a detailed analysis released this month by Ernst & Young. The mobile, social, cloud computing, storage, security, and analytics segments drove much of that activity, as did healthcare and clean energy.
A sign of the times: Companies whose core business isn't technology accounted for 15 percent of tech acquisition value in 2010, up from 8 percent in 2009, according to the Ernst & Young report. In the fourth quarter, for instance, the two largest health IT deals involved two "non-technology" companies: pharmacy benefits manager Medco's $730 million acquisition of United BioSource, a developer of Web and voice response systems, and iinsurer Aetna's $500 million purchase of Medicity, a maker of health information exchange technology.
In fact, the distinction between tech and non-tech companies is starting to become artificial. Visa plunked down $1.83 billion for CyberSource, a payment management software company, in the 10th largest tech acquisition of the year. Is Visa a financial services company heavily dependent on technology, or is it a technology company that delivers financial services? Regardless of the semantics, expect this trend to accelerate in 2011.
The number of technology M&A deals rose 41 percent in 2010 compared with the year earlier, to 2,658, the largest number since the 3,345 deals done in pre-recession 2007, according to Ernst & Young. The total value of tech deals in 2010 increased 26 percent year over year, to $119 billion, though the average value per deal, $131 million, was down 10 percent--owing to more but smaller deals overall. Private equity firms accounted for $19.7 billion of that $119 billion in total deal value, more than double the $9.8 billion PE firms spent on tech acquisitions in 2009. Last year also saw a surge in cross-border tech M&As. They accounted for 41 percent of total deal value in 2010, compared with 25 percent in 2009.
Twenty-six technology M&A deals topped the $1 billion mark. Among the biggest ones were Intel's $7.29 billion deal for McAfee (security), SAP's $5.65 acquisition of Sybase (analytics, mobile Integration), NTT's $3.23 billion acquisition of Dimension Data (IT infrastructure services), EMC's $2.25 billion acquisition of Isilon Systems (storage), Attachmate's $2.14 billion deal for Novell (infrastructure software), and Hewlett-Packard's $2.07 billion acquisition of 3Par (storage). Two private equity deals made the top 10: the Advent International and Bain Capital deal for most of RBS Worldpay (a unit of Royal Bank of Scotland) and Carlyle Group's $2.98 billion acquisition of CommScope (carrier infrastructure).
Google was the most prodigious tech acquirer in 2010, disclosing 28 deals in social networking, e-commerce, document collaboration, mobile video, gaming, payments, and other areas, according to Ernst & Young. The likes of IBM and Cisco have taken a similar tack over the years--buying small, innovative companies as de facto R&D arms rather than developing all their own technologies from scratch.
The fact that Google is returning co-founder Larry Page to the CEO chair--bumping CEO Eric Schmidt up to executive chairman come April--is an indication that Google is revving up its internal R&D and innovation engine after years of mostly acquiring companies for that purpose. (As an important aside, the number of technology company initial public offerings more than tripled in 2010, to 180, indicating that successful innovators have other options besides getting acquired.)
Nonetheless, expect the pace of industry consolidation to quicken in 2011 as companies with new-found cash expand into new technology, industry, and geographic markets and augment existing ones. Leading the way will be the usual suspects: IBM, Oracle, EMC, Microsoft, Dell, EMC, CA, Cisco, and HP (which just announced it's acquiring analytics specialist Vertica). But expect non-traditional players like Google and Facebook, as well as those from outside the industry, to shake things up as well.