Tech M&A Market Driven by Competition, Innovation

Particularly hot assets for upcoming deals include smart mobility, cloud computing, social networking, big data analytics and accelerated adaptation.

IT management and M&A

The technology space is one of the hottest sectors for deal making in terms of mergers and acquisitions (M&A), and 38 percent of respondents have an intention of doing tech M&A in the next 6 to 12 months and are being driven by increased competition and new breakthroughs, according to a report from Ernst & Young (EY).

The report said particularly hot assets for upcoming deals include smart mobility, cloud computing, social networking, big data analytics and accelerated adaptation, as well as new technologies such as the Internet of things (IoT) and augmented or virtual reality.

"The mega-trends of mobile, social, cloud and big data analytics will continue to drive deal activity, making this period the golden age of M&A activity for the sector," Jeffrey Liu, U.S. technology sector leader for EY Capital Advisors, told eWEEK. "Additionally, executives want to acquire assets in particularly hot areas like the Internet of things and augmented or virtual reality, and there’s a rush to do so before their competitors do."

Growth is a priority for 50 percent of executives, up from 40 percent in the last study, suggesting that they are taking opportunistic risks.

Nearly half of U.S. respondents (48 percent) cited their inorganic growth will take the form of innovative investments that shift the scope of their business, either into another industry or sector, and 35 percent said they would pursue deals to gain access to new technology and intellectual property.

"All businesses must embrace tech innovations to survive in today’s world," Liu noted. "That said, it is in traditional industries that we see tech innovations being the most disruptive as new innovations have been able to disrupt the natural order of business models that have largely gone unchanged for years. Some of the areas that are most prominently going through a forced change due to new technology implantations are the hospitality industry, transportation industry and telecommunications industry."

Middle-market acquisitions are set to nearly double, with 52 percent of companies expecting to pursue deals between $50 million and $250 million in the next year.

"Middle market transactions have always commanded the lion’s share of merger activity, and will continue to do so. The increase in middle market transactions is in line with the overall focus on acquiring new technology, talent and entering new markets," Liu said. "After a year marked by notable megadeals, we’ll continue to see an uptick in middle-market deals as companies refocus on their core businesses and look to reshape their newly acquired assets."

Hot sectors for M&A include automotive and transportation markets, tech, consumer products and retail, and financial services deals, which are expected to lead the way over the next year.

Liu said he expects M&A to remain strong for the foreseeable future as EY believes the market is in the early innings of transformational trends defined by cloud computing, Internet of things, big data, mobility and social media, combined with the underlying security challenges that businesses face with the aforementioned trends.

He explained 43 percent of tech respondents said that they had five deals or more in their pipeline, a substantial increase from the 14 percent of tech companies that had over five deals in their pipeline in April.

"I think this will be an active year for the industry as companies focus on core efficiencies and product improvement," he said. "Meanwhile, we’ll see deals from lower organic growth companies that have an urgency to acquire growth. Growth over profitability premium will likely remain prominent, resulting in premiums in valuations for growth. It will also be interesting to watch how shareholder activism continues to shape deal making in the sector."