M&A in the IT Market

CDI Global, a leading non-bank M&A and corporate development advisor for middle-market transactions, reveal mergers and acquisitions in the IT market are set to increase over the coming months, fuelled by an ever-growing need for the incorporation of technology into business.

The last few years have proven to be record-setting years for M&A in the Fintech industry, with over 400 mergers and acquisitions, worth a combined total of $64 billion, in 2015, a 100% increase on 2014. Urs Huber, CDI Global’s local partner for Switzerland and leader of the Telecom, Media & IT Group shares his insights on the M&A IT market. Urs previously worked at Credit Suisse in M&A and structured finance, as well as CS Group for strategic IT initiatives, and has led a number of software and IT services related transactions and has been involved in a number of financial technology deals.

 

Cyber Security

Cyber Security is big business at the moment, with Lloyd’s PLC estimating that cyber-attacks potentially cost businesses up to $400 billion a year. Urs reveals “One of the biggest things we’re seeing in the market place at the moment is the increasing need from end customers to protect their data against hacking.  Businesses are concerned about secure data and access, which has made room for smaller players to carve out their niche business in their respective jurisdictions. In 2 to 3 years’ time I expect these smaller players will be bought by the bigger enterprises. At this very moment we’re negotiating a merger between two Swiss cyber security companies”.

Tripwire.com previously reported “the increasing complexity of today’s rapidly evolving threats targeting government entities and organizations in every industry vertical have fuelled an unprecedented number of mergers and acquisitions in the vendor arena recently.”

Analysts are said to believe the current increase in M&A activity is expected to gain further momentum in the coming months and years as big companies invest substantial amounts in their security solutions. From cloud security to SIEM (Security Information Event Management) and mobile security to big data, both inside and outside of the security community, there is substantial interest in this emerging M&A trend.

 

IPL Valuations

But there are some that believe even the M&A market isn’t immune to the maxim ‘all good things must come to an end’ with speculation as to whether the momentum will continue beyond 2016.  Aggressive (still over-valued) M&A will continue in specific segments, like digital security and cloud integration services, well into 2017 and 2018. It’s hard to predict if a general US recession will drive technology valuations down or if the collapse of technology valuations will trigger a broader recession. Many of the 2015 non-technology mergers and acquisitions were market-defensive and some were simply inversion-driven.”

Urs comments, “CDI wrote an article on M&A trends for 2016 in which Executive Managing Director Jeff Schmidt mentioned that, in the ICT and Telecoms market, companies are often not well prepared when it comes to financials and I think he’s right. I’m not sure if the unicorn phenomenon and the belief that if you grow people will be climbing over each other to buy you, is going to continue this year.” Urs adds “the IPL market in the US is cooling off quite a bit, confounded by the intent to increase interest rates confirmed last week.”

He reveals, “Old value companies, like LinkedIn, have had a hard time keeping their IPL valuations, many are still able to raise capital, even in the billions of dollars, but I’m not sure whether the market will allow them to find easy exits. We’re seeing a nervousness in valuations this year compared to last.”

 

The Internet of Things

CDI report that the Internet of Things (IoT) will play a more prominent role in the evolution of the IT market as companies strive to differentiate and create competitive advantage. Urs comments, “there have been fears of attacks on power grids in Germany, of course this has a direct impact on consumers who depend on those grids. We’ll see a lot of technology emerging in the IoT space, especially from IT service and grid providers, Google are particularly focusing on the IoT in the West.”

Companies are increasingly adopting M2M solutions triggered by cost savings via automation, process and productivity improvements. Based on the Gartner Hype Cycle, Internet of Things, data centres, software security and wearable electronics are expected to grow within the next 5-10 years, further driving M&A activity within the Telecom, Media & IT Market.

The growing momentum for the Internet of Things will be fuelled and made possible by big data analytics and the investors and companies seeking to expand their holdings in the market.

Big Data and M&A’s Joe McKendrink wrote in Forbes, “the lines between industries as well as non-tech and tech companies continue to get blurrier and blurrier.” Similarly EY’s most recent look at global merger and acquisition activity in the IoT showed “growth in deals targeting big data analytics, the Internet of Things and payment and financial services technologies made the biggest contributions to value during the third quarter of 2015.”

 

Big Data

There’s no denying that big data is big business. In a recent press release the IDC reveal “The Big Data market continues to exhibit strong momentum as businesses accelerate their transformation into data-driven companies.” With a new forecast from International Data Corporation (IDC) seeing the big data technology and services market “growing at a compound annual growth rate (CAGR) of 23.1% over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019.”

Urs explains, “European big data companies try to sell themselves to large, US counterparts and US companies tend to grow through acquisitions. Similar companies in Europe make between 10-20 million dollars compared to the half a billion dollars US big data companies are making, thanks to their acquisitions. We help US and European companies approach investors as well as negotiating sales to US companies.”

He adds, “venture capitalists are investing $50-100 million in Silicon Valley businesses, many of which are loss making and who buy market share with the VC’s money. Whereas in Europe it’s more difficult for companies to find VC, so the market evolves very differently in this space. Companies are forced into profitability so they can’t spend the marketing dollars that their US counterparts can, they have to focus on generating revenue and it takes longer for them to grow as they have to fund growth from their own cash flow. A lot of VC’s and early stage investors are fed up of this process and try to sell their stakes, which gives US companies the opportunity to buy up these companies. We’ll see consolidation in the mobile space as we see increasing pressure to come up with new revenue models in Europe for telecom operators.

Urs discusses CDI’s expertise within the big data M&A market, “we’re also involved in arranging mergers with Fintech companies between Switzerland and the US and get involved in fundraising for Series A and B companies.”

 

Social Media

Urs adds, “in the Western world, Europe and the US there are two players that define the social media landscape: Facebook with Whatsapp and Messenger and Google with YouTube. I think we’ll see them embedding ecommerce capabilities into their offerings, things like online games that entice you to buy additional points. Most companies in Europe try to keep up with these 2 key players and follow their lead.

 

In conclusion

CDI partners have closed an impressive number of deals in different Telecom Media & IT segments, from Technology OEMs and telecommunication vendors to mobile software solutions and platforms to cloud computing. Working across the globe, with practical experience in the corporate or operational Telecom, Media & IT industries, CDI offers direct access to dedicated software and technology growth funds as well as to corporate level Telecom, Media & IT industry players and are contributing to the burgeoning global IT M&A market.

Compiled by CDI Zürich

 

References

 

https://www.finextra.com/news/fullstory.aspx?newsitemid=28371

 

http://www.forbes.com/sites/stevemorgan/2015/11/24/ibms-ceo-on-hackers-cyber-crime-is-the-greatest-threat-to-every-company-in-the-world/#290871503548

 

http://www.forbes.com/sites/joemckendrick/2015/11/28/the-internet-of-things-dominates-recent-mergers-acquisitions/#e90bfb810de6

 

http://dataconomy.com/top-5-merger-and-acquisition-trends-in-2014/

 

http://www.idc.com/getdoc.jsp?containerId=prUS40560115

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