2019 M&A outlook: Heavy tech acquisitions ahead after blockbuster 2018
An uptick in M&A activity this spring could put the brakes on IPO activities as more businesses decide to cash in and sell.
Editor's note: This is the second part of a look at the technology market in 2019. Check out our feature from last week on what to expect from technology IPOs in 2019.
IPOs are set up for a strong year, but mergers and acquisitions could nab many technology players off the path to becoming a public company.
More technology companies are expected to leave their private status behind through M&A than through an IPO. IPOs are a long, complicated and costly process, and investors and leadership can often make a quicker return on investment through M&A.
If a $100 million software company can get a premium of 10 times its revenue — pulling in a $1 billion price tag — business leaders can be hard-pressed to turn down that opportunity, Steve Ingram, National Technology and Life Sciences industry leader and partner at RSM, said in an interview with CIO Dive.
The frequency of acquisitions means technical leadership has to pay close attention to what's happening in the market. Big tech could easily takeover a product in their portfolio through a purchase, and continued service or conflicts of interest have to be taken into account.
What's in store for 2019?
One need only look so far as the unicorn market to see the prowess of technology companies.
Internet software and services companies account for 24% of the 300-plus, billion-dollar companies worldwide, followed by e-commerce companies at 13% and fintech at 10%, according to CB Insights.
Cybersecurity and data analytics command seven and 11 unicorns, respectively, and other categories, such as social, travel tech, auto tech and on demand, are built on an advanced technology foundation.
More than half of tech executives expect M&A to be the most popular exit strategy for tech companies this year, according to a BDO Technology Outlook Survey. Only 14% said a U.S. IPO would be the top strategy.
An uptick in M&A activity this spring could put the brakes on IPO activities as more businesses decide to cash in and sell, Ingram said. Many companies file for an IPO and do the dual track for M&A because, after more than a decade, investors are tired and want to finally unlock the value they are holding onto.
Enterprise technology companies worth watching on the IPO path include Slack, CrowdStrike, Cloudflare, BigSwitch Networks, Vertiv and Rackspace, according to Renaissance Capital.
Big tech companies have accumulated massive amounts of wealth, and they are using their wallets to gobble up companies in hot markets such as cloud and artificial intelligence.
2018 was a huge year for technology mergers and acquisitions, and experts believe the pace of big technology deals will continue this year.
Last year, nine multibillion-dollar business technology acquisitions drew attention, including:
- IBM's $34 billion acquisition of Red Hat
- Microsoft's $7.5 billion acquisition of GitHub
- Broadcom's $18.9 billion acquisition of CA Technologies
- SAP's $8 billion acquisition of Qualtrics
The number of multibillion-dollar deals is not necessarily an indicator of general M&A activity, however, and they tend to be rarer occurrences in the market.
Acquisitions in the range of $100 million to $1 billion are generally the "bread and butter" for venture capitalists, Bill Baumel, managing director at the Ohio Innovation Fund, in a statement provided to CIO Dive in December.
M&A activity is a key indicator of corporate strategy. When a large tech company can't or doesn't want to build a functionality or service itself, buying up the technology of a smaller company can prove a more efficient route. And if a company wants to dabble in a newer space, like IBM and hybrid cloud, acquisitions can provide a heavy foot in the door.
Acquisitions have been indicative of many businesses moving from a cloud-first to software-first focus. Differentiation in the market is increasingly falling to software prowess.
In 2019, there have already been a handful of acquisitions by large technology companies, including:
- Dropbox's $230 million acquisition of HelloSign, an e-signature company
- Microsoft's acquisition of Citus Data, an open-source tech company, for an undisclosed amount
- Google Cloud's intended acquisition of Alooma, a data and cloud migration company
- Amazon Web Services' acquisition of CloudEndure, a disaster recovery company
With billions in cash on hand, a stable economy and a booming sector, big tech is expected to continue the aggressive pace of technology M&A for the remainder of the year.
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