Big Tech Deals Take a Holiday. Enjoy It While It Lasts.
RIP, big technology deals. It was fun while it lasted. But also good riddance, big technology deals, even if they won't stay dead for long.
This year through Thursday, there have been about 6 percent fewer takeovers of U.S. technology companies than there were in the same period of 2016, according to Bloomberg data. That's not bad, but the value of those deals is a stunner. Acquisitions of U.S. tech companies this year have a combined announced price tag of $35.8 billion, about one-third of the $104 billion in collective takeover value at this point in 2016.
The big hole is huge acquisitions. In the first half of last year and in 2015, there had been on average more than 15 U.S. tech takeovers announced at more than $1 billion, Bloomberg data show. So far this year there have been seven. 1 Outside the U.S., megadeals have also been scarce compared with prior years.
It's inevitable there would be a bit of a breather after two banner years for corporate acquisitions. That doesn't explain the decline entirely, especially given how many people predicted an M&A bounty when the man behind "The Art of the Deal" moved into the White House.
The blame so far has fallen on the usual suspects when dealmaking goes on a holiday, plus a Trump twist. Tech valuations are becoming expensive even for confident corporate acquirers. The hot-and-heavy acquisition activity in the last couple of years left fewer obvious companies available to buy, and a number of deal-hungry tech acquirers are busy digesting prior takeovers.
And for the Trump twist: It's fair to say there isn't as much clarity as companies would like on policy issues important to M&A, such as taxes, corporate regulation, health care changes and global trade agreements. Uncertainty is bad for the dealmaking business.
Mind you, it's not necessarily a bad thing for big tech deals to go on hiatus. Tech history supports the maxim that big-ticket acquisitions don't often work out so well. The company formerly called Hewlett-Packard struck three $10 billion-and-up takeovers in the last 20 years -- Compaq, EDS and Autonomy -- and all have been duds. The private equity buyout of First Data on the cusp of the financial crisis and Symantec's $13.7 billion takeover of Veritas didn't turn out so hot, either.
And good technology companies don't tend to need the type of consolidation or cost-motivated acquisitions that have become commonplace. There are outliers, such as the many big takeovers in recent years aimed at consolidating the semiconductor business. For the most part, though, successful tech companies tend to focus on growth opportunities in their existing businesses, with a few exceptional deals here and there.
Still, elements of the recent tech M&A pause make me nervous. It is meaningful that some potential buyers are gun-shy because they think anything they might want to buy is too expensive.
People who buy companies always want them to be cheaper, of course. But we are in a unique period. The price-to-sales multiples of the S&P grouping of technology companies is the priciest it has been compared with the broader S&P 500 index since 2010, Bloomberg data show. 2
Among fast-growing software companies that are often mentioned as potential takeover targets, prices and valuations have become particularly stretched. The BVP Cloud Index as of its latest update in mid-May was at its highest point since the index started in 2011. Pharmaceutical company software firm Veeva -- an often-mentioned takeover target -- is trading just off its highest valuation in at least two years. Expensive stocks are a particular turnoff for private equity firms that have been among the most active buyers in the tech industry.
The valuations of potential tech buyers are up, too, which should give them rich stock to go hunting for deals. But the normally acquisitive SAP, Oracle and Microsoft have been relatively quiet. Ditto for Facebook. It's interesting to wonder whether the increasingly powerful tech elite are deal-shy out of concern about antitrust authorities, prickly politicians or their stockholders.
And some of them may be worried about appearing overly confident when things are going well. Salesforce.com Inc. has been noticeably less M&A active after it chased aggressively after LinkedIn and took heat from shareholders for flirting with the idea of buying Twitter (for some reason).
The hiatus for big tech takeovers won't last forever. If there is a sustained hiccup in tech stock prices, look out. A downdraft for tech stocks in early 2016 helped spark an acquisitions wave. U.S. corporate tax changes could deliver cash windfalls that tech giants would be pushed to spend on takeovers or other priorities. Tech bankers are eagerly standing by. But I hope they stay bored for a little bit longer.
In case you're wondering, Amazon.com Inc.'s $13.7 billion agreement to buy Whole Foods doesn't count as a tech deal in Bloomberg data because the company to be acquired isn't in technology.
The gap between tech stocks and the broader index isn't so pricey on a price-to-Ebitda basis.
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Daniel Niemi at firstname.lastname@example.org