Survey says financial buyers will play an increasingly important role in overall market activity not only this year, but for the next few years
Hong Kong (April 27, 2017) – Morrison & Foerster, a leading global law firm, announced the results of its semi-annual M&A Leaders Survey, in which the prevailing view is that technology M&A activity will accelerate over the course of 2017. Slightly more than half of the respondents (52%) forecast that deal flow will top last year’s level; this group represents more than three times the 15% of respondents who expect year-over-year activity to decline in 2017. Also, the majority of respondents (54%) forecast an increase in private equity activity as compared with 2016.
The survey follows a relative slowdown in the number of deals during the first quarter of the year, though there was an increase in aggregate value. According to 451 Research’s M&A KnowledgeBase, there were 912 deals with an aggregate value of $77 billion in Q1 2017, compared to 1,065 deals with an aggregate value of $74 billion in Q1 2016. However, 2017 comes after two years of the highest tech M&A spending since the Internet bubble burst. Collectively, acquirers in 2015 and 2016 announced deals valued at more than $1 trillion, according to the M&A KnowledgeBase.
“The survey forecast represents the most bullish outlook in two years,” said Robert Townsend, co-chair of Morrison & Foerster’s Global M&A Practice Group. “The slight slowdown in Q1 activity is almost entirely attributable to less shopping by corporate acquirers. Still, we are encouraged by the optimism around tech M&A in the U.S. for the rest of the year.”
Key findings, takeaways, and analysis from the M&A Leaders’ Survey include:
Cross-Border M&A to See Change
Part of what will help M&A accelerate this year, at least in the view of a plurality of survey respondents, is the new administration in the United States. Four out of 10 (41%) forecast that President Trump's future economic policies will stimulate dealmaking, almost twice the 22% that said his policies will slow M&A.
Conversely, M&A between the two largest economies in the world, the U.S. and China, is expected to be particularly difficult in the coming years. Two-thirds of survey respondents (65%) predicted that Chinese acquirers will slow their purchases of U.S. tech companies, more than four times the 14% that said the opposite. Similarly, more than half (55%) of the survey respondents said U.S. companies will do fewer tech deals in China. That sentiment is already coming through in the actual deal flow, where Chinese acquirers of Chinese tech assets have outnumbered U.S. buyers of Chinese tech assets three to one, according to 451 Research’s M&A KnowledgeBase. Still, 49% of survey respondents expect an increase in acquisitions by Chinese companies in countries other than the U.S.
“Although the tightening of capital outflow from China and other factors such as political uncertainties have considerably dampened China outbound investment activities in the past few months, we believe that market sentiment began to shift with the Trump-Xi summit in April 2017,” said China corporate partner Chuan Sun. “We are again witnessing a rather substantial increase in Chinese companies seeking outbound opportunities, particularly in sectors in which investment is encouraged by the Chinese government (e.g., technology) and in countries included in the “One Belt One Road” initiative. The level of interest of Chinese investors in US assets remains high. The key question for many of these investors is: what will the Trump administration’s policy on CFIUS be? If US investments by Chinese companies will be subject to heightened scrutiny under the Trump administration, Chinese investors may decide to look elsewhere for opportunities.”
“Some Chinese A share listed companies that had been flush with cash from high valuations, have gone under scrutiny by regulators at home as they have attempted to invest in the US, and as these deals break, have made their US counterparts more weary about the ability for Chinese companies to close deals or successful integrate them,” added Hong Kong corporate partner Thomas Chou, “However, several of the more established Chinese companies are still actively looking for outbound opportunities. These companies tend to have M&A departments staffed with sophisticated and international deal makers who have the network and expertise to identify the right assets abroad that can be leveraged back in China to fuel the technology driven consumer economy. We are also seeing an increase in focus on South East Asia and South Asia – these companies have developed market leading products and services in mobile, drones/robotics, FinTech and ecommerce, which resonate with the young and developing middle class in these regions.”
Financial Acquirers Key to Overall Market Activity
Survey respondents expect that financial buyers – the rivals to tech vendors for many targets – will play a major role in overall market activity. That was true for this year (with 54% forecasting an increase in Private Equity activity compared with 2016), and even more so when the timeline was extended out to 2020 (with 59% anticipating an increase in PE activity compared with 2016).
PE firms are expected to focus on a mix of old and new M&A strategies, according to the survey. Respondents predicted that “bolt-on acquisitions” would see the largest increase in activity from buyout shops through 2020, which is unsurprising given that buyout shops typically acquire two or three times as many bolt-ons as platforms in any given year, and they usually involve smaller, less-risky transactions. However, the survey respondents’ second-ranked strategy of recapitalizing Venture Capital-backed startups comes as a relatively novel driver of PE activity. Up until now, there have not been many of those types of transactions, but as companies inside venture portfolios continue to age beyond the eight to ten-year holding period for most VC firms, the startups may seek new backers. The demographics of the startup ecosystem appear to support this trend.
Read the Chinese version of the report.
About the M&A Leaders Survey
The survey – a partnership project between Morrison & Foerster and tech market intelligence firm 451 Research now in its 11th edition – examines significant developments in deal terms, as well as sentiments and trends in key technology markets across the U.S. and the most active countries and regions internationally. This survey was conducted in April 2017 and had over 150 participants, primarily corporate or M&A executives (44% of respondents) and investment bankers (42% of respondents), with the remaining responses coming from lawyers, VCs, PE professionals, and others in the M&A community. Roughly nine out of 10 responses came from dealmakers and advisers based in the U.S.; Silicon Valley represented the largest single location, accounting for some 40% of the total.