Technology M&A — 4Q16 and year in review
Digital disruption propels industry shifts — and record annual value.
Second-order effects of the core disruptive digital technologies — mobile, social, cloud and big data analytics — helped 4Q16 drive full-year 2016 to a second consecutive all-time high for annual tech M&A aggregate value — despite a 15% drop in M&A value for all industries over the same period.1
While some signs point to moderating tech M&A during 2017, the massive digital transformation caused by disruptive cloud, mobile, social and big data analytics technologies that is behind tech dealmaking is still young. As 2016 progressed, second-order effects such as potential business model change emerging from digital transformation became clearer: key related technologies such as the Internet of Things (IoT) and connected cars posted their highest quarterly values yet in 4Q16, a related semiconductor deal almost reached $40 billion and deals targeting cloud data center technologies helped IT services to its highest-value quarter of the year.
- 4Q16 aggregate value of disclosed-value tech M&A deals was $117.2 billion, down 38% year-over-year (YOY) but still the sixth-highest quarterly value ever. That drove the 2016 annual total to $466.6 billion, 2% higher than 2015’s previous record of $459.6 billion.
- Eighteen 4Q16 deals topped $1 billion; the biggest, at $39.2 billion, was the year’s fourth above $10 billion (compared with eight last year but only six in the previous decade).
- Private equity (PE) buyers posted another strong quarter in 4Q16 and set new volume and value records for the year.
- Quarterly volume of 844 deals declined 9% YOY and 7% sequentially, the second consecutive quarterly decline. At 3,796 deals, annual volume declined 5% from 2015.
- Cross-industry blur increased all year, as non-tech-buyer value more than doubled in 2016 to $107.9 billion despite slowing in the fourth quarter.
- The volume of deals targeting IoT, cloud/SaaS, big data analytics and connected car technologies rose for the fourth quarter and the year, despite the overall global volume decline. From a value perspective, only IoT and connected car deals rose for both the quarter and the year.
- Cross-border (CB) aggregate deal value fell sequentially to $67.8 billion but was still the second-highest CB quarterly value total ever. It brought full-year 2016 to a new all-time CB value record of $208.2 billion.
“Stack-to-solution” deals help IoT, connected car and cloud targets drive 4Q16 value total
Tech companies continued seeking stronger positions within key disruptive digital technologies in 4Q16. The trend we call stack to solution, motivated by acquirers’ desire to deliver more complete customer solutions (as opposed to only a portion of the technology stack), was exemplified in multiple big-ticket IoT, connected car and cloud/SaaS deals. Cloud/SaaS-driven deals were set apart from the pack in terms of volume, while connected car and IoT deals were set apart in terms of average value, mostly because of a handful of very large deals.
Despite the overall decline, volume rose YOY in 4Q16 for deals targeting big data analytics, cybersecurity, cloud/SaaS, IoT, connected cars and health care information technology (HIT). Volume fell for deals targeting smart mobility, payments and financial services, gaming, and advertising and marketing technologies.
Though full-year aggregate value rose in 2016 for 7 of the 10 deal-driving trends, only IoT and connected car also saw value rise in the fourth quarter.
Corporate tech buyers return, PE buyers stay strong as 4Q16 pushes the year to a new aggregate value record
Though their aggregate disclosed value fell steeply YOY (from a post-dotcom-bubble record), incumbent tech companies pursuing transformation posted their highest quarterly value of the year ($81.6 billion). That led 4Q16 to $117.2 billion in aggregate value and helped push 2016 to a new all-time annual value high, $466.6 billion.
Non-tech buyers, however, had their lowest-value quarter ($14.7 billion) on the way to more than doubling their 2015 annual value total to a record $107.9 billion in 2016.
At $20.8 billion, PE buyers had their fourth-highest total ever — but only the third-highest of 2016. For the full year, PE set new all-time records for volume (383 deals) and aggregate disclosed value ($90.1 billion).
IoT, connected car and semiconductor targets drove the most 4Q16 value, in part because the largest deal of the quarter was a $39.2 billion semiconductor consolidation deal that included IoT and automotive motivations. Cloud data center and security technology targets were also important value drivers for the quarter, included in five and three, respectively, of the 4Q16 deals over $1 billion.
US buyers dominate 4Q16 cross-border deal value
As happened a year ago, US CB buyers reversed a slow year in terms of their CB value and dominated 4Q16. At $43.4 billion, US buyers acquired 64% of disclosed value for deals across borders. But this time, 90% of the US value came in one deal: the quarter’s $39.2 billion megadeal, which also accounted for 58% of total CB value ($67.8 billion).
Also notable in 4Q16 CB dealmaking:
- US companies were targeted in $16.6 billion in disclosed-value deals, including three of the seven CB deals that topped $1 billion. That’s down from a $29.9 billion peak in 3Q16.
- European targets had the most disclosed value, largely because the megadeal target was based in the Netherlands.
- Asia-Pacific was the only other net seller (besides the US), thanks to one $8 billion deal with a South Korean buyer and US target.
- At $2.4 billion, China had its lowest CB quarter of the year — though its significantly higher totals earlier in the year led to a full-year total of $42.8 billion.
For full-year 2016, CB value was $208.2 billion. The top five buyer countries by value were the US, China (mainland), Japan, the UK and Canada.
Outlook | Digital transformations will continue to drive tech M&A
Given two consecutive quarters of declining volume, the mixed messages tech executives sent in our October 2016 Capital Confidence Barometer survey (described in our 3Q16 report) and still-rising geopolitical and economic uncertainty, we expect 2017 to see a decline from 2016 levels for global technology M&A activity. But that decline will likely be small. Technology continues its rapid evolution, and all industries are experiencing profound disruptive digital technology transformations. Tech dealmakers — whether tech incumbents, non-tech buyers or PE — know they can’t wait for markets to stabilize; they’re ready to make deals when opportunities arise. To help assess your dealmaking opportunities, we suggest technology executives test their organizations against these questions:
- Are we positioned to offer customers true solutions or even answers, as opposed to just a point offering in the overall technology stack?
- Is there a “hidden gem” among our business units and other departments with the potential to drive greater value?
- Has disruptive technology placed our organization “in the crosshairs” of some upstart companies or of activist investors?
- Are we doing all we can to provide comprehensive security in our offerings?
“Expect global technology M&A values and volumes to remain high in 2017 — though perhaps not quite at the record-breaking levels seen in 2016. But get ready for new disruptions, such as artificial intelligence and machine learning, and second-order effects made possible by disruptive digital technologies. These could drive dealmaking higher late in the year and in 2018.”
1“Will 2017 Be the Year of the Deal?” The Wall Street Journal Online, 30 December 2016, © 2016 Dow Jones & Company, Inc.