tech m&a leaders' survey - april 2018...2016 40% april 2017 33% 31% forecast change in...

TECH M&ALeaders’ Survey

April 2018

TECH M&ALeaders’ Survey

April 2018

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2018 Tech M+A Leaders’ Survey – Morrison & Foerster / 451 Research 3

Tech M&A Leaders’ SurveyMorrison & Foerster / 451 Research

Anticipating the return of strategic acquirers, tech dealmakers have delivered their most bullish forecast in four years. For the first time since April 2014, two-thirds of respondents to the semi-annual M&A Leaders’ Survey from 451 Research and Morrison & Foerster expect an increase in tech M&A deal volume in the current year. This time around, 66% of dealmakers told us they expect an increase in deal volume, up from 51% in September and the highest level since April 2014 (72%), counting on stable purchasing from private equity (PE) and a boost in corporate M&A in the wake of the new tax law.

The suddenly rosy forecast upends an extensive stretch of stable predictions. Each of the last three surveys witnessed little deviation in the results with between 47-52% of respondents projecting an increase and an identical spread among the projected decrease (15-20%). In those three surveys, dealmakers were 2-3 times more likely to anticipate an increase than a decrease in tech M&A. In this iteration, they were seven times more likely to foresee acquisitions increasing.

Forecast Change in Acquisition ActivitySource: Tech M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Tech M&A Activity Outlook


No avoiding taxes

Changes to the US tax code may have only had limited impact on deals announced early in the year, as they were only enacted in the waning days of 2017. Yet, our survey shows the new rules are widely expected to propel tech M&A volume this year, as 65% of respondents projected that the new law would bolster overall dealmaking. Corporate acquirers and their targets will pay a lower tax rate, freeing up overseas cash that could potentially be used for acquisitions. The effects, so far, are mixed—the first quarter was the strongest start to the year since the recession in terms of spending, though deal volume was more modest.

Compare that with minimal benefits to private equity (PE) and there’s little surprise that more respondents expect the tax law to catalyze corporate M&A and sponsored deals. The Tax Cuts and Jobs Act limits the deductions on interest that companies pay, though it does lower rates for those portfolio companies. Less than half (47%) expect the measure to help grow PE deals, compared to 66% who expect it to boost strategic M&A.

Strategic comeback

The number of tech deals printed by PE firms topped those done by NYSE- and NASDAQ-traded acquirers for the first time in 2017 as PE pushed to a new record—an accomplishment those buyers have now repeated for five consecutive years. At the same time, acquisitions by US-listed strategics declined for the second straight year, though 58% of our sample expect those acquirers to buy more often this year than they did in the last one. Our respondents assigned most credit for the decline in strategic M&A to high valuations—81% said that was a strong factor. Lower corporate tax rates could decrease valuation sensitivity among strategics and enable them to win deals from PE firms—46% said outbidding from PE firms was a strong factor in the decline of strategic M&A.

Complementing the anticipated rise in tech M&A, respondents forecast a rise in valuations. Expectations for rising activity among strategics and favorable IPO markets (more on that below) pushed respondents to predict expanding valuations among private company targets at the highest proportion in three years. Over the next 12 months, 39% said valuations will rise, compared with 29% predicting a decline—a notable shift from our September survey when 24% came out in favor of an increase and 31% for a decline.

Corporate acquisitions

PE acquisitions Asset acquisitions

100%90%80%70%60%50%40%30%20%10%0%

24%39%

47%

36%

Potential impacts of new tax law by acquisition typeSource: Tech M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Tax Cuts and Jobs Act

51%

No change

Increase

Decrease

66%

17% 10%10%


Passport not required

Beyond taxes, other government initiatives could weigh on acquisitions of US tech targets. The Trump administration has few qualms in getting directly between buyer and seller, having quashed a handful of acquisitions of US-based companies by Chinese firms. That trend is expected to continue and negatively impact M&A markets, with 54% saying that scrutiny from CFIUS will deter dealmaking. Nearly the same number said trade disputes (51%) and antitrust concerns (49%) will have the same effect.

Stronger protectionist measures translated into modest expectations for cross-border M&A. Acquisitions that happen outside a buyer’s home turf have made up an expanding portion of the tech M&A landscape, peaking in 2016, when the value of such deals totaled $234bn before dropping 45% last year. Despite an expanding list of tariffs on US imports, more respondents expect an increase in cross-border deals (41%) than a decrease (33%). It’s worth noting, however, that the result is narrower than the spread for the overall tech M&A market.

Respondents provided their most dismal cross-border forecast for China-based buyers going after US-headquartered companies. According to the 451 Research M&A KnowledgeBase, the value of such deals fell in 2017 to just $500m from $11.5bn a year earlier. There wasn’t a single announced deal in the first quarter of 2018, justifying the dreary outlook from our respondents who overwhelmingly (65%) expect such Sino-US acquisitions to decline.

Increase Decrease

100%90%80%70%60%50%40%30%20%10%0%

October2012

25%

28%

April2013

53%

14%

October2013

36%

21%

April2014

48%

11%

October2014

26%

34%

April2015

50%

18%

October2015

18%

52%

April2016

19%

64%

October2016

26%

40%

April2017

33%

31%

Forecast Change in Private Company M&A ValuationsSource: Tech M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Tech M&A Valuation Outlook

Sept.2017

24%

31%

April2018

38%

29%


PE set to stabilize

Despite PE having put up its busiest-ever first quarter, the outlook for a continued run has darkened a bit. While the survey tilts toward those expecting PE spending to increase (47%), the percentage dropped from 59% in the September survey suggesting that PE’s share of the M&A market might not get much larger, but it’s not set for a steep decline.

As they ink new deals, several new factors could diminish the prices those firms are willing to pay. Rising interest rates are expected to put a damper on valuations in PE purchases, with 69% anticipating that effect, and 48% predicting that changes in the deductibility of interest will weigh on pricing. Competition from both strategic acquirers and other PE firms could provide some counterweight, as more than half expect those dynamics to play a part in bolstering PE pricing.

100%90%80%70%60%50%40%30%20%10%0%

October 2016

28%

45%

27%

October 2017

12%

59%

29%

April 2018

13%

47%

40%

April 2017

20%

54%

26%

Stay the same

Increase

Decrease

Forecast change in PE spending for the next 12 monthsSource: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Private Equity Outlook

Annual worldwide tech deal flow ($bn)Source: 451 Research’s M&A KnowledgeBase

Cross-border Tech M&A

Cross-borderDomestic

$700

$600

$500

$400

$300

$200

$100

$02008

$58

$194

2009

$39

$104

2010

$61

$119

2011

$94

$140

2012

$82

$111

2013

$83

$163

2014

$159

$233

2015

$147

$427

2016

$277

$234

2017

$203

$128


While fewer predict an increase in new PE acquisitions, an expanding cohort suggested a smoother path to exit for portfolio companies as enterprises ramp up their shopping. Almost half (48%) expect a favorable exit environment for PE over the next three years, whereas in September’s survey, almost as many (45%) predicted an unfavorable environment, while just a third did so in this survey. Over the next year, sales to strategics are expected to provide a plentiful avenue for those exits. A full 64% of respondents anticipated that such exits would increase this year, second only to exits via IPO, which 49% of dealmakers see as increasing. (Only one PE-owned tech company, Thoma Bravo’s Sailpoint, made it to a major US exchange last year).

Glittery outlook for unicorns

PE portfolio companies aren’t the only ones garnering a sanguine outlook in the IPO market. In 2017, a number of unicorns—startups with a pre-IPO valuation north of $1bn—tested the public markets, resulting in a failing grade. Snap, Blue Apron and Cloudera all had down-round IPOs, though debuts from Dropbox and Spotify this year left those companies with valuations above their last private financings.

In their wake, more are expected to follow onto the NASDAQ and NYSE. In our survey, 48% dealmakers projected that, on average, unicorns would end their first day of trading above their previous post-money and 43% said they’d fall. The bulls were generally more aggressive in their predictions—30% of overall respondents said unicorns would finish their first session on the street up 10% or more from their private valuation, while just 19% predicted they’d be down by that same level.

*About the survey: Now in its thirteenth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster drew 128 responses, primarily from corporate or M&A executives (47%) and investment bankers (35%), with the remaining responses coming from lawyers, VCs, PE professionals and others in the M&A community. Roughly 80% came from dealmakers and advisers based in the US; Silicon Valley represented the largest single location, accounting for 37% of the total.

Forecast average change from private valuation after first day of tradingSource: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Unicorn Debutants

Up 20% or more

48%Predicted

rising valuations

Up 10-19%

Up 1-9%

9%

21%

18%43%

Predicted declining valuations

Down 10-19%

Down 1-9%Down 20% or more

3%

15%

24%

tech m&a leaders' survey - april 2018...2016 40% april 2017 33% 31% forecast change in...

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