Even as the U.S. and other economies struggled through 2011’s second and third quarters, the technology industry has shown no sign that it’s feeling a pinch.
According to a recent Ernst & Young report, tech-sector mergers and acquisitions activity exploded during 2011’s second quarter, driven primarily by cross-border transactions.
According to the report, aggregate disclosed cross-border deal value grew 118% and volume grew 16%, while in-border deal value grew only 75% and deal volume actually declined by 11%.
Canada led the pack in cross-border technology transactions during Q2. Outshining perennial tech heavyweights, including Japan and Taiwan, Canadian technology companies closed 30 deals during the second quarter of 2011 alone, a nearly 50% increase in deal volume over 2010’s second quarter.
A large portion of these deals involved cross-border acquisitions: Canadian technology companies spent roughly $240 million to acquire foreign companies; foreign companies spent approximately $480 million to acquire Canadian companies. Only the U.S. outranked Canada in the number and valuation of cross-border transactions in Q2 2011.
Cascadia believes the strong foundations Canadian tech companies have laid across several hot sectors are key drivers behind the surge in Canada’s cross-border deal volume.
Security, health-care information technology, social networking, mobile and cloud technologies all proved to be top M&A targets during Q2 2011. The strength of Canadian companies in these sectors was apparent in the number of transactions companies successfully closed across the country.
Cross-border prospects have remained open to Canadian companies during the third quarter as well.
Despite the strong growth in Q2 and Q3, technology companies – on both the buy and sell sides – need to carefully plan their acquisition or exit strategies as the U.S. economy continues to struggle.
Technology companies looking to make strategic acquisitions have recently been stockpiling cash, and cash and investments held by the sector’s top 25 companies saw an 18% year-over-year increase between the 2010-11 second quarters – to US$591 billion from US$499 billion. This wealth of cash and assets has given these companies the flexibility to act quickly when strategic acquisition opportunities arise, fuelling the higher second-quarter transaction volume.
While available cash affords strategic investors flexibility, companies on both sides of the M&A divide need to consider the broader issues in order to continue to drive M&A activity.
Several factors, including increasing divergence between buyers and sellers over valuation, geopolitical unrest and global debt issues, continue to build a barrier to successful M&A transactions, and available cash will likely not be enough to overcome these significant hurdles.
While challenges exist, the trend toward cross-border deals will help sustain deal volume in the tech sector. At 311 deals worldwide, cross-border transactions accounted for 40% of all deals in Q2 2011, a significant increase from 34% in the year’s first quarter, as well as all of 2010.
The average value of cross-border transactions also grew 49% year-over-year to $229 million in Q2 2011 from $154 million in Q2 2010, while the average deal value for all transactions, including domestic and cross-border, increased only 39% year-over-year.
For companies looking for an exit, cross-border deals are generally garnering better valuations and stronger deal terms.
For companies looking to expand through acquisition, cross-border deals afford them the opportunity to not only diversify their assets, but also to provide them with geographic diversity and new market opportunities. •
