Have Tech Deals recovered from the Financial Mushroom Cloud?

Introduction

In this article, I will be discussing briefly but with just enough detail if technology M&A has recovered from the financial crisis of 2008, short and long term trends from my own perspective.

What happened to technology M&A?

Global GDP growth. Source: World Bank

Global GDP growth. Source: World Bank

Before I discuss about the sector, I will go through briefly the cause of the it’s decline in the M&A value. Global GDP growth fell sharply from 3.98% in 2007 to -2.11% 2009 due to the fears of many consumers and businesses, some of them have poor or non-existent credit record, were unable to repay their loans (1). This was caused by a combination of factors such as:

  • Some say, bankers telling their computers to say ‘yes’ to printing new money at will when loans were issued, often without adequate checks
  • Packaging of these loans into ‘safe’ investments for sale to inspecting investors and other factors
  • Lowering of interest rates in many advanced economies to encourage economic growth in the aftermath of 9/11 and dot-com bust. This created ideal conditions for businesses and consumers to take out loans to respectively for investment and non-productive spending, like bling goods. This in turn led to many taking on unsustainable debt once interest rates rose
  • Real estate and other bubbles due to low interest rates and the over-confidence of the belief that the good times will not end
  • Financial institutions biting more than they can chew through excessive leverage (using debt to make extra profits)

This in turn led to annual and first quarter announced technology M&A values respectively decreased from $146.8 billion and $40.2 billion in 2008 to $124.35 billion and $9.45 billion in 2009 (2)(3)(4)(5). This is because of falling confidence in the global economy so many technology companies held back their business plans until they made were sure things were on the mend.

Global annual and first quarter announced values in technology M&A. Note – All Q1 values are estimates based on multiplying global M&A Q1values by global sector share of High Technology, except for years 2007, 2013 and 2014 which are actual values (6)(7)(8). Annual figure is estimated (6). Source: Thomson Reuters

Details of the calculation of the values are found through this link.

After 2009, annual and first quarter announced M&A values have recovered. The former has risen to $181.89 billion in 2013, highest since 2008 but 22.8% below it’s 2007 level, and the latter increased to $70.09 billion in the first quarter of 2014, just 11% shy of it’s 2008 level (7)(8). I believe that this year’s annual M&A value might exceed that level. This is because of the following:

  • Global inflation has remained quite stable from 2009 onwards after a sharp drop from it’s 2008 peak (9)(10). This provided a relatively stable economic environment to encourage investment.
Global inflation. Source: World Bank.

Global inflation. Source: World Bank.

  • After the financial crisis has slightly dented global earnings and income per person, the global economy has continued to grow from 2009 because major developing economies such as China took appropriate actions at the time to keep theirs running at an astonishing speed (11)(12).
Economic growth in terms of earnings and income per person respectively. Source: World Bank

Economic growth in terms of earnings and income per person respectively. Source: World Bank

  • The ongoing battle for dominance in the mobile market between the major players, such as Samsung, Apple and Google, to provide consumers more entertaining and better productive experience. For example:
    • Samsung acquired CSR, a UK startup, in July 2012 for $300 million to gain the necessary expertise in order to develop better WiFi and Bluetooth, satellite positioning capabilities for their own future smartphone models (13)
    • They also bought mSpot in May 2012 to use their technology to provide better music, video and radio services for their smartphone users and offer their cloud services to a wider audience (14)
    • In August 2011, Google bought Motorola Mobility Holdings for $9.4 billion to gain the necessary patents and technology in order to enable the firm to develop it’s own smartphones without relying on joint ventures and directly compete against major producers such as Apple, Samsung, Sony and LG (15). However, they sold it to Lenovo for $2.91 billion in January 2014 after struggling to turn the business around. This enables Lenovo to gain access to the US smartphone market, forming one part of their plan to increase global market share (16)
    • They also acquired Bump Technologies in September 2013 to help users choose and share their own information even easier than before (17)
    • Apple bought SnappyLabs in January 2014 to improve the camera capabilities of their line of smartphones (18)
    • The firm also purchased Novauris recently in 2013 to improve their own speech recognition software Siri on their own devices (19)
  • The challenge of the social media providers to help people easily connect with each other around the world and providing the right adverts and recommendations based on their own information and use of the services. For example:
    • LinkedIn acquired Bright for $120 million in February 2014 to use their computer programs to show relevant jobs to their users based on their expertise, experience and preferences (20)
    • In the same month, Facebook bought WhatsApp for $19 billion to gain 450 million users, many of them who are young and do not use social networks. This new asset means that users do not have to use traditional mobile networks to keep in touch with their contacts, lowering costs of communication further (21)
    • Google bought Titan Aerospace in the same month, for at least $60 million in my opinion, to use solar powered drones to deliver internet connection to remote and often inaccessible areas. This will definitely benefit developing countries the most because using drones can be used to set up internet connections at a lower cost compared to the traditional under the ground wired connections. Also, it enables more opportunities for social connections (22)
    • Twitter purchased MoPub for $350 million in September 2013 to use their expertise to deliver better advertising based on the users’ location (23)
Global device shipments (in thousands). Source: Gartner

Global device shipments (in thousands). Source: Gartner

  • The computing market is expected to lose more market share compared mobile devices, such as tablets and smartphones, because the latter is more affordable to purchase, maintain and upgrading to new devices meaning more people have the opportunity to use the internet to social and productive reasons (24). Manufacturers in this market have to adapt fast in order to survive and prosper. For example:
    • Lenovo decided to buy back their mobile and tablet division for $200 miilion in November 2009, a year after selling it in 2008 for $100 million, to diversify into these markets after they realised that smartphones had become increasingly popular since the launch of the first iPhone back in 2007 (25)
    • Microsoft bought Nokia’s mobile phone business in September 2013 for $7.2 billion because they had missed out on the rapid growth of the smartphone and tablet markets. This helps them to gain a foothold in these markets to allow them to compete against more established players such as Apple, Samsung and LG (26)
    • Dell purchased Wyse, a global market leader in thin-client systems (a computer that has just enough features to allow the user to do various tasks while connected a network), in April 2012 to diversify away from their personal computing business and gain expertise in the former market (27)
  • Services to help people and organisations provide better and consistent presence on web. For example, Yext bought Citrrus in April 2014 to enable them to better help businesses synchronize the content and data on their listings on services such as Yelp (28)
  • Due to the rapid growth of the mobile device market, temporary demand for extra computing power for research and productive reasons, users desire to use their device to control their other devices, monitoring, and the people’s desire to access their data whenever and wherever they choose, there is a rising demand for cloud computing services:
    • Lenovo bought Stoneware in September 2012 to allow the latter to offer a broader range of cloud computing services and acquire the relevant expertise to develop better services in the future (29)
    • Microsoft acquired Greenbutton in May 2014 to offer a wider range of services to allow more users to take advantage of their high performance cloud computing infrastructure to process large amounts of information in an increasing variety of situations (30)
    • In June 2013, IBM purchased SoftLayer Technologies for about $2 billion to bolster their cloud computing capabilities and offer a wider range of services to small and medium sized businesses and consumers (31)
  • 3D-printing was invented in 1984 and the industry took 25 years to take off when the average price of a 3D-printer for personal use fell dramatically because manufacturing methods and parts costs went down.. The global 3D-printing market has experienced stable growth from $1.1 billion in 2009 to $2.6 billion in 2013. As 3D-printing becomes even more widespread among consumers and organisations and applied in an ever increasing range of applications from health to musical instruments, the market is expected to expand to about $6.5 billion in 2019. (32) Many 3D printer makers are acquiring relevant assets and firms to speed up development of new technologies and provide a broader range of products and services. For example:
    • 3D Systemcompleted their acquisition of Xerox’s solid ink engineering and development assets and relevant patents for $32.5 million in January 2014 to accelerate development of new models of printers incorporating solid ink technology (33)
    • In June 2013, Stratasys bought MakerBot for $403 million to diversify into the desktop 3D printer market and offer affordable printers (34)
    • ExOne has purchased MWT and Machin-A-Mation $4.8 million and about $5 million respectively in March 2014.  These allow the buyer to respectively incorporate complete their production line and improve production methods of industrial 3D printers (35)
Bitcoins in circulation

Bitcoins in circulation. Source: Blockchain.info

Bitcoin transactions in USD.

Bitcoin transactions in USD. Source: Blockchain.info

  • Bitcoin was first mention in 2008 in an research paper, Bitcoin: A Peer-to-Peer Electronic Cash System. Details of how the currency works in plain English is described on the Bitcoin website. It was invented a year later and the number of Bitcoins in circulation, users and transactions has risen over the past 5 years to 2014 (36)(37)(38). These are still increasing fast and I expect that more consumers and businesses to use the currency in a wide variety of transactions in the future when all of the problems will be resolved. A number of firms are making purchases in their quest to dominate their niches in the Bitcoin market. For example:
    • In March 2014, Blockchain bought RTBTC.com, a trading platform that users to trade bitcoins in various digital currency exchanges, in order to build one of the first comprehensive trading platform in bitcoin. This complements well with their bitcoin wallet and block explorer to provide a one-stop shop for researching bitcoin data, holding and trading bitcoins (39)
    • An unnamed buyer bought SatoshiDice, a gambling platform for bitcoins, for $11.5 million in July 2013 (40)
    • Efftec International acquired BitBank application in January 2014 to expand it to achieve their goal for it to become the first source of information for Bitcoin and other digital currencies (41).

Where might technology M&A go in the future?

In the short term:

  • Global technology M&A activity in terms of value will rise as the global economic climate improves when many developed economies currently trying to lower their debts, such as Greece and Italy, start to recover. However, M&A may rise a little slower because of China’s economy developed fast due to the bank sector expanded very fast. The government is trying to figure out how to shrink the sector without affecting economic growth too much.
  • M&A activity in the smartphone market may go up because smartphone manufacturers want to dominate the market through various means such as new technologies and various smartphone models to suit different types of consumers.
  • Social media M&A activity may increase because major players, such as Facebook and Google, are still racing to the ultimate goal of helping everyone connect with each other no matter where they are in the world, providers want to find new ways to help people express themselves and communicate with others online, and some want to find new ways to collect even more data from people, from their own will, and increase profits from advertising.
  • Bitcoin and 3D-printing M&A may rise slowly as the society slowly adapts to new technology, overcome fears of associated with these new technologies and the cost of 3D-printers fall even further.
  • M&A in the mobile device market may go up because usage will increase and manufacturers will acquire relevant firms and assets to diversify into different markets and offer better user experience. However, traditional computing will have a place because of their superior power, compared to mobile devices, which is suitable for high performance applications, such as video editing, gaming and computer-aided design. Therefore, M&A is this sector may involve market consolidation and acquiring relevant assets and firms to allow manufacturers to focus on various niches.
  • Cloud computing M&A activity will go up because of the rise in the usage of mobile devices means that there will be rising demand for users wanting access data at any time, from anywhere and from any device. Also, there will be more users who will temporarily need extra computing power for high intensive uses such as mathematical calculations for simulation and research.

In the long term:

  • Global technology M&A will roughly follow global economic cycles of boom and bust because virtually all of the world’s economies, some say, [legally] allow private banks to create money at will through new loans. Also, the sector activity will stay roughly stable due to the ongoing trend of the entrepreneurial revolution where technology is increasingly replacing people in more  jobs and disputing the society because the former can perform in them more efficiently at a lower cost. This mean that there will be a shift of power from the organisation to the individuals. Even some large firms are recognising this trend today.
  • Bitcoin M&A activity will go up because the digital currency will be used by more people and businesses in the future once all of the problems have been resolved and firms in the market acquire relevant assets and firms to enable them to dominate their niches such as accepting bitcoin and converting them into national currencies like the dollar. Eventually, bitcoin may be a widely accepted form of currency alongside national currencies.
  • 3D-printing M&A activity will increase because the more people and businesses will use them to manufacture their products, design and make one-off products at the consumers’ own preferences, make prototypes to test their products and iron out potential problems before formal launch at lower costs. Eventually, 3D-printers will be in most homes and businesses. This means that firms will acquire or merge with others to diversify into different markets, cater for different types of consumers and businesses and further improve user experience.
  • Cloud computing, smartphone, social media and mobile device M&A activities will rise because more people and businesses will be connected to the internet through existing and new technologies, demand for these products and services will rise, especially in the developing economies. Therefore, deals will typically involve around improving user experience, innovation, developing new products and diversifying into these markets. Traditional computers may not be used in the long run due to improvements in computing power in mobile devices will result in high intensive applications such as complex photo and video editing may be possible.

Sources

  1. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2008
  2. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2009
  3. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2008
  4. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2009
  5. Thomson Reuters DAILY DEALS INSIGHT Facebook’s 2nd largest acquisition boosts Tech M&A to $65.2 bln YTD 26 March 2014
  6. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2014
  7. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2013 Note: Sources 2 to 8 can be accessed through Thomson Reuters Deal Making Intelligence website.
  8. World Bank – Inflation consumer prices annual retrieved 1-5-2014
  9. World Bank – Inflation GDP deflator annual retrieved 1-5-2014
  10. World Bank – GNI per capita PPP current international $ retrieved 1-5-2014
  11. Samsung hits the acquisition trail, 17 June 2012 retrieved 2-5-2014
  12. Samsung Acquires Mobile Entertainment And Music Streaming Startup mSpot, 9 May 2012 retrieved 2-5-2014
  13. Google to buy Motorola Mobility in biggest deal ever retrieved 2-5-2014
  14. Lenovo to buy Google’s Motorola in China’s largest tech deal retrieved 2-5-2014
  15. Google Buys Bump App for Easy Sharing retrieved 2-5-2014
  16. Apple Acquires Rapid-Fire Camera App Developer SnappyLabs [Update: Confirmed] retrieved 2-5-2014
  17. Speech Recognition Pioneer Novauris Bought By Apple, Team Now Works On Siri retrieved 2-5-2014
  18. LinkedIn makes its biggest acquisition by paying $120m for job matching service Bright retrieved 4-5-2014
  19. Facebook to buy WhatsApp for $19 billion retrieved 4-5-2014
  20. Google to buy drone-maker Titan Aerospace retrieved 4-5-2014
  21. Twitter Buys MoPub For $350M To Up The Ante In Mobile Advertising retrieved 4-5-2014
  22. Gartner Says Worldwide Traditional PC, Tablet, Ultramobile and Mobile Phone Shipments On Pace to Grow 7.6 Percent in 2014 retrieved 5-5-2014
  23. Lenovo to Acquire Mobile Handset Business retrieved 5-5-2014
  24. For Microsoft, Nokia Deal Was Long and Arduous retrieved 5-5-2014
  25. Dell buys Wyse, plays ‘cloud client’ game retrieved 5-5-2014
  26. Yext Acquires Software Consulting Firm Citrrus To Build Its Professional Services Team retrieved 6-5-2014
  27. Lenovo Acquires U.S. Software Firm  retrieved 5-5-2014
  28. Microsoft Buys New Zealand Start-up GreenButton to Boost Azure Platform retrieved 5-5-2014
  29. IBM Pumps Up in Cloud Computing by Buying SoftLayer retrieved 5-5-2014
  30. A WHOLE NEW DIMENSION retrieved 6-5-2014
  31. 3D Systems Completes Acquisition of Xerox’s Oregon Based Solid Ink Engineering and Development Teams retrieved 6-5-2014
  32. Stratasys to Acquire MakerBot, Merging Two Global 3D Printing Industry Leaders retrieved 6-5-2014
  33. ExOne Announces Acquisitions retrieved 6-5-2014
  34. Blockchain – Total Bitcoins in Circulation retrieved 6-5-2014
  35. Blockchain – My Wallet Number of Users retrieved 6-5-2014
  36. Blockchain – Number of Transactions per Day retrieved 6-5-2014
  37. Blockchain Acquires Trading Platform to Expand ZeroBlock
    retrieved 6-5-2014
  38. First big Bitcoin acquisition: gambling site SatoshiDice bought for $11.5M retrieved 6-5-2014
  39. Efftec Fully Completes Acquisition of BitBank, a Bitcoin Market and Valuation Application for iOS retrieved 6-5-2014

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About Martin Yau

I'm an Intelligent Investor & a Maths Graduate seeking a back/middle office role within the banking and finance sector.
This entry was posted in M&A Analysis, Mergers and Acquisitions, Social Media, Technology and tagged , , , , , , , , , . Bookmark the permalink.

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