Technology and Digital Takeovers Drive Global M&A

MUNICH, Sept. 26, 2017 (GLOBE NEWSWIRE) -- The technology sector has become a major driver of global M&A activity as acquirers from both inside and outside the tech industry seek to expand their technology and digital capabilities. Deals involving technology targets totaled more than $700 billion in 2016 and represented nearly 30% of all M&A activity, according to The Boston Consulting Group (BCG) ’s 2017 M&A report, The Technology Takeover , released today.

The biggest factor behind tech M&A is the rise in acquisitions of tech targets by companies from nontech sectors. These buyers are seeking to expand their technology capabilities to catch up with digital trends, internalize technological and digital skills, and use acquisitions to accelerate business model innovation and digitalization.

To better understand the trend toward more technology M&A, BCG assembled a proprietary database of more than 43,000 high-tech deals over the past 20 years, developing a lexicon of 450 technology business terms to use in screening companies and transactions for inclusion. This research showed that M&A transactions involving tech targets doubled over the past three years. The share of acquirers of tech targets from outside the tech industry has grown by 9 percentage points since 2012, to around 70% of all tech transactions. Also, every industry sector in the BCG Technology Deals Database showed a significant increase in the share of tech deals since 2012.

Three of the biggest trends driving the rapid pace in tech acquisitions are the rise of Industry 4.0, a big increase in cloud computing and cloud-based solutions, and the search for mobile tech and software application providers.

Median EV/sales multiples for digital targets rose almost 50%, increasing from 2.1x in 2013 to almost 3x in 2016. The highest multiples in 2016 were paid for gaming (3.9x), fintech (3.2x), cloud-based services (2.8x), and mobile and app developer (2.8x) targets. The median EV/sales multiples for Industry 4.0 targets was 2.0x, reflecting the fact that many of these transactions involve hardware companies, which typically have lower margins than their software counterparts.

“Digital and advanced technologies have disrupted multiple industries already, and they are making their influence felt across most others,” said Jens Kengelbach, a BCG partner, the global head of the firm’s M&A efforts, and a report coauthor. “Time to market and reaching critical mass are key considerations, and companies often don’t have the time—or the talent—to build the capabilities they need themselves. Companies are turning to M&A to acquire new capabilities and close innovation gaps.”

There was one counterintuitive result: the report, which was produced in collaboration with Paderborn University, found that more innovative companies are the ones that undertake more tech acquisitions. Acquirers, in both the tech and the nontech sectors, that primarily buy nontech targets had a median R&D-to-sales ratio of 1.2%. Companies that focus on tech acquisitions had a median R&D-to-sales ratio of 5.5%. A more detailed analysis by industry segment confirmed that the search for innovation also drives the appetite for M&A: the more a company spends on R&D organically, the more likely it is also to be an active acquirer of tech targets.

A New Tech Bubble? While tech EV/EBIT multiples are at lofty levels—an average of 24x over the past three years, well above the long-term average of 20x—transaction multiples involving nontech targets have risen by similar amounts. High valuation levels are currently a fact across the full M&A market and do not necessarily signal an industry-centric tech bubble ahead.

“Today’s tech M&A market is somewhat different from the dot-com fever back in 2000,” said Georg Keienburg, a BCG principal and a report coauthor. “For one thing, the companies being acquired are more mature and profitable now than they were in the dot-com times. For another, buyers today are much more knowledgeable about how the specific technology will help to digitally disrupt their own business models from the inside rather than being disrupted by someone else.”

Do Tech Deals Add Value? In 2016, some 70% of the M&A tech targets ended up in the hands of a nontech buyer. Both the media EV/sales multiple of 3.3x and media EV/EBIT multiple of 26.5x were especially high for larger tech deals (those worth more than $1 billion), reflecting that buyers see some targets as must-have assets, even if the potential for value creation is lower. Even given the high multiples paid, serial digital acquirers (those making six or more acquisitions over the past 20 years) generated one-year relative total shareholders returns (RTSRs) of 4.4% more than their relevant index. The RTSR for less frequent acquirers was flat or slightly negative.

“Successful acquirers of tech firms do three things right,” Kengelbach said. “They follow a focused strategy, they develop a tailor-made M&A process for tech targets, and they build the right corporate organization to find, execute, and integrate innovative tech firms.”

A copy of the report can be downloaded at http://on.bcg.com/2wH3Rq0 .

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com .

About The Boston Consulting Group The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with more than 90 offices in 50 countries. For more information, please visit bcg.com .

The Boston Consulting Group Eric Gregoire Global Media Relations Manager Tel +1 617 850 3783 Fax +1 617 850 3701 gregoire.eric@bcg.com