By now it is apparent that many of the mid-to-large tech leaders are investing in acquisitions to outgrow their competitors, increase their marketshare, or move into new market opportunities more rapidly. In fact, when surveyed in late 2010 by Thomson Reuters, corporate decision-makers said that the top two reasons for mergers and acquisitions this year will be to add market share in their current businesses or to expand their geographic scope. At the bottom end of the list of drivers were acquisitions to cut costs through economies of scale and to add new product lines.
Many technology companies currently have a surplus of cash on hand. Couple this with the low returns provided by financial markets and the uncertain economy, and you have a perfect storm for M&A activity. Experts have predicted a 36% increase in deal-making globally this year and we expect that will hold true within the software, telecom, and tech markets.
A recently released Ernst & Young report stated that the total value of all disclosed value deals more than doubled year-over-year to $27 billion and that the deal numbers increased 26% YOY – making this the eighth consecutive quarter without a decline. Read that last line again – it’s important. Deal values have increased every quarter in the last eight. As Charlie Sheen would say, “Winning”.
The usual suspects are still the ones to watch this year: IBM, Oracle, Microsoft, Cisco, Hewlett-Packard, and Google. They’ve each been very busy investing in acquisitions and taking advantage of a tech market that has more to offer them, along with the cash to invest.
Since 2010, IBM has done 17 acquisitions and is moving deeper into mobile software and services.
Oracle has completed 10 acquisitions in software subindustries, with Cloud Technology becoming their focus.
Microsoft announced just 3 acquisitions in 2010 although the actual number was reported to be much higher (over 15), and of course the big kahuna was their recent acquisition of Skype for $8.5B.
Cisco is moving into virtualization and cloud management products and has already announced 3 acquisitions this year, adding to the 5 they announced last year.
Hewlett-Packard has been looking at cloud technology companies and is rumoured to be looking at moving into mobile ad networks. They announced 6 acquisitions last year, with 2 coming in at over $2B (3Com at $2.7B and 3PAR at $2.35B).
Google has been voracious in its appetite for acquisitions. They announced 26 of them in 2010 and have already announced 10 this year.
By now you’re probably asking “So what? How does M&A activity among companies of these sizes going to impact me? Or will it even impact me?”
The answer is that as the big technology giants begin to acquire more companies in select markets, everyone else operating in those markets will now be coming up against a competitor that is bigger, stronger, and has the resources to push products and services decisively ahead of their smaller competitors.
Typically what we see in these situations is M&A activity trickling through the market down to companies that are much smaller, as they also decide to either acquire or merge with a larger firm to fuel growth, or decide to take advantage of a market that is clearly ripe for well-run, profitable, and growing companies by larger firms looking to acquire.
Consequently you begin to see your competitors either selling, or acquiring, and changing the landscape as a result.
This creates a couple of issues:
- Your competitors become larger as they add to their structure; and
- Your customers look at the products of the companies acquired with the view that “if Company A bought these guys, then their product must be pretty good”. And of course, their new marketing materials and smoother sales approach (borrowed from the large new owner) only serves to reinforce this. This creates an instant hurdle for your marketing and sales teams to get across.
Of course it doesn’t always follow that Company 1 + Company 2 = Company 3. Sometimes the whole turns out to be somewhat less than the sum of its parts, while at other times, adding Company 2 allows Company 1 to become a far superior version of its former self.
So what should you do? Make a plan.
You need to map out your growth goals, your shareholders’ goals, and make sure that your strategic roadmap is going to get you there. Continue to revisit it and tweak it as needed. You need to be prepared to go up against a competitor who suddenly has deeper resources. You need to be constantly aware of who is developing technology that might be disruptive to your market. If sales are declining, you need to determine whether it’s due to product / technology issues or people issues (weak management, sales, or marketing) and then make a plan to deal with it. Look at each area in your company with a critical eye and ask yourself “If I were looking at my company with a view to buy it, would this pose a problem? An opportunity? Or would it be a deal-breaker? Would it affect my valuation? How do I rectify it?”
Even though an M&A event may not be on your shareholders’ radar today, get your company in a state of readiness. If an opportunistic buyer comes knocking, you want to be sure that your company will not only stand up to scrutiny, but will, on closer examination, become a coveted target to potential buyers.
Think you’d like some help with this? Our Strategic Audit and Valuation process is a high-level consulting and analytical tool we use to help companies understand areas they need to address in order to identify the optimum strategy that will return shareholders’ maximum value in a liquidity event or exit. The process takes several days to complete with input from your executive team and once finished, your “Strategic Valuation Report” will outline concrete steps you can take to increase your company’s valuation and better prepare for an eventual liquidity event. Senior Advisor, Jim Pullen, has consulted with companies large and small, including Mitel, Polaroid, DEC, ICL, Huawei and HCL. If you’re interested, please contact Jim at jpullen@tequityinc.com or call 416.483.9400 x105.