Explaining why TMT M&A deals at highest level since 2006

By April 1, 2014 No Comments

Over the weekend the FT wrote that the value of TMT M&A deals in Q1 was $174bn, the highest level since 2006 and up 65% on the year ago period.

The market is hot right now. No doubt about it. The $174bn includes a bunch of cable deals that aren’t relevant for the startup community, but even with those stripped out I’m sure the picture is still very healthy.

‘Is this a bubble?’ I hear you say.

I don’t think so. I think there are two reasons why companies are currently paying a lot to acquire startups. One that is hear to stay for the long term and another that is linked to the current low interest rate environment.

As I’ve written many times the pace of change continues to increase and that will be a long term driver of M&A, both big and small deals. Gene Sykes, Head of Global M&A explains why in the FT article (also linked above):

“It is the most interesting and disruptive time in the market I have ever seen. The value of the technology incumbents is more at risk than it has ever been. The best way for the established tech companies to overcome the challenge of new forms of technology is for them to be venturesome, as some of the leading companies have recently demonstrated.”

Facebook’s multi-billion dollar acquisitions of Oculus Rift and Whatsapp, and Google’s $3.2bn acquisition of Nest and string acquisitions in the robotics space are all best understood in this light. Moreover, this is a trend that is only going to increase. So long as there are highly valuable companies out there they will increasingly find their valuations at risk as their markets shift ever faster.

The second driver of high value M&A at the moment is the low interest rate environment. Simply put, when interest rates assets investments which increase in value are harder to find and hence more valuable (Fred Wilson explains the maths here). Hence stock markets reward growth and companies pay more for acquisitions which give them the growth that stock markets desire.

Tech is the main source of disruption and one of a small number of sources of growth. That’s why TMT M&A is breaking records right now, and why I’m optimistic about the future for our sector.