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Q3 M&A–volume flat, average value falling fast

Ernst and Young’s latest quarterly Global Technology M&A Update found that the number of announced deals is pretty much flat year on year and compared with the last quarter, but the average value of those deals fell sharply to $185m. That’s 43% down on Q3 2011 and 12% down on Q2 2012. There were 752 deals announced in Q3, of which 153 disclosed the deal value.

The authors blame the decline on the poor macroeconomic environment, saying that in times like these executives are risk averse and reluctant to make large acquisitions. I’m sure that explains a large part of the decline, but I think that many companies have changed their M&A policies in recent years and are looking to make more small acquisitions to acquire technology and talent in new markets. Twenty years ago they were able to predict which new technologies would affect their businesses with reasonable accuracy and develop them internally, these days new markets are spinning up too fast for that to work well and they increasingly outsource that function to entrepreneurs and early stage investors. This type of deal is typically cut early in the life of a company before the market and or tech are well established and deal sizes are smaller than for companies acquired to secure a position in a developed market.

Two of Google’s last three announced deals with terms disclosed illustrate this well. Face recognition tech business Viewdle was acquired for $45m in October to help them augment their existing products whereas Wildfire Interactive was acquired in August for $450m to get Google into the established social media marketing industry where they had fallen behind Salesforce (Buddymedia) and Oracle (Vitrue).

The E&Y data only looks at announced deals and the deal size data only looks at deals where terms were disclosed, so most tech and talent acquisitions aren’t even in this data set. If they could be included I think we would see that the average deal size is dropping even faster, but that deal volumes overall are increasing.

There were some other interesting data points in the report:

  • Private equity accounted for 7% of deals, down from nearly 10% a year ago.
  • The average private equity deal was $443m – 2.68x the corporate average.
  • Software/SaaS was by far the biggest sector (see chart below)
  • Large corporates and private equity are sitting on a lot of cash (top 25 corps had $689bn at the end of the quarter)
  • The average European deal value was $60m – just 32% of the global average

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