MoFo News Item

First Look Report: 6th M&A Leaders' Survey

24 Oct 2014

M&A Outlook – Will This Year’s Robust Deal-making Continue?  

Highlights:

  • Nearly half (48%) the respondents to the M&A Leaders’ Survey expect overall tech acquisition activity, which has been running at a record rate in 2014, to accelerate throughout the next half-year.
     
  • Although the 48% that forecast an uptick in our just-completed survey dropped from the high-water mark of 72% in the April 2014 survey, it essentially matches the level from our surveys over the previous two years. That’s the case even though global tech M&A spending so far in 2014 is higher than the spending in the same period of 2012 and 2013 combined, according to the 451 Research M&A KnowledgeBase.
     
  • The percentage of survey respondents who said the tech M&A market is likely to be busier from now through next spring is three times higher than the 16% forecasting a decline in acquisition activity.
     
  • One reason respondents reined in their M&A forecast is they appear to be bracing for higher interest rates. More than four out of 10 (43%) said the wind-down of the Federal Reserve’s bond-buying program, which had the effect of keeping interest rates artificially low, would slow deal-making. The 43% that forecast a slowdown due to the Fed’s “tapering” was five times as high as the number of respondents who said the opposite. Further, it was 14 percentage points higher than those who forecast a slowdown in M&A due to higher interest rates in our survey a year ago.

Selected Comments:

Don’t expect another boom on top of this one – but fundamentals remain strong

  • 2014 was a quantum leap up. Stagnating equity markets and modest growth will start to put some overhang on the market, but will remain in very good shape.
  • Expecting a decrease only because 2014 YTD has been such a torrid pace, and I’m expecting things to cool off somewhat relative to that run-rate.
  • Company's earnings are still strong, strategic acquirers still have cash and confidence to make deals happen.
  • With the recent stock market volatility, we may see a slowing of M&A activity in the short term. However, the fundamentals still point to increasing technology M&A over the medium and longer term.
  • Current pace (en fuego) non sustainable.
  • Soooo much liquidity...

We may see changes in the kinds of deals being done

  • [Acquirers are] likely to focus more on fewer, but larger and more strategic deals rather than talent and “bolt-on” acquisitions.
  • What appears to be global softness from an economic growth standpoint will likely cause acquirers to become more introspective and less confident about making meaningful strategic (M&A) decisions.
  • Tepid growth in the economy will drive M&A in tech companies for cost efficiency. Also lots of legacy vendors” with lackluster product lines relative to what is coming out in the market.

Outlook for Private Company M&A Valuations

Highlights:

  • The outlook for private company M&A valuations has never been more bearish. A record 34% of respondents forecast that sale prices for startups would head lower from now through next April, compared with 26% who saw prices ticking higher. The pessimistic view comes as an unprecedented number of startups have raised private market funding at valuations north of $1bn.
     
  • The percentage of respondents forecasting a decline in M&A valuations for startups tripled from April to October (11% to 34%). That’s the biggest downturn in sentiment toward private company pricing we’ve registered in the six surveys we’ve done.

Selected Comments:

  • [Valuations] obviously have been on a hockey-stick-like trajectory over the past 24 months. As fewer big “strategic” targets remain, I expect their valuations will continue to increase (as long as there are enough potential acquirers remaining in the relevant space). I expect over time that the smaller “talent type” targets will see their value decrease as acquirers have significantly restocked and the pool of talent available in acqui-hire targets diminishes.
  • A cool off (but not collapse) of the public market valuations will bring down M&A multiples, but could be a catalyst to bring bids and asks together.
  • Competition for assets will somewhat increase valuations.
  • I expect that a cooling tech IPO environment will mean that fewer private companies will have an IPO as a realistic liquidity option, lowering “floor values” for privates.
  • Higher aggressiveness on behalf of PE/VC funds will continue to inflate valuations. Likewise, tech companies have some “superstar showings in the market (e.g., Tableau) that do the same.
  • I think we are beginning to see valuations moderate with public markets declining. This will take a while to trickle down to the private markets, but I expect it to happen in the next six months.

Impact of Surge in Big-Ticket Late-Stage Financing Rounds  
We posed the following question: “A number of private companies have recently raised late-stage financing that roughly matches the capital and the valuation that a public offering might typically provide. In your opinion, what impact is the increase in big-ticket late-stage financing having on the number of tech IPO or tech M&A transactions?”

Highlights:

  • Cash-heavy late-stage investors are noticeably crimping deal flow for tech IPOs as well as M&A, according to our survey. Seven of 10 respondents (69%) said the billions of dollars of growth capital available to startups is slowing the number of offerings. Similarly, survey respondents were almost half again more likely than not to say the availability of late-stage capital is slowing deal-making (44% indicating a slowdown vs. 30% indicating a pickup).

Selected Comments:

Should increase M&A

  • The companies receiving funds are becoming buyers.
  • Capital is capital. To the extent large, cash-rich private companies continue to perform (e.g., grow/make progress to profitability), the decision to defer or even bypass a public offering should actually accelerate M&A by adding more strategic buyers to the mix.
  • Classic supply and demand: If supply of cash in the nonpublic capital markets is plentiful, IPOs will slow with companies taking down capital with fewer strings. Companies will use this capital to grow organically and inorganically; therefore, M&A activity will increase.
  • Acquirers concerned that valuations will move out of range even before the IPO unless they act with conviction early on next generation of leaders.

Likely to defer – or inhibit – transactions

  • Unfortunately, [the influx of capital is] reinforcing current owner misconceptions of inflated valuations.
  • For IPOs, in some cases, the pre-IPO round is just paving the way to an IPO by bringing in crossover investors, but for others, it is done out of necessity. … on balance if the company receives more capital they can delay the IPO. Similarly, more capital gives companies more options to hold off an M&A exit, in addition to setting a high bar for valuation.
  • I think many of these companies will have trouble actually going public and growing into the valuations under increased scrutiny.
  • High valuations make M&A harder as the new investors need to see upside.
  • The tech IPO market is broken. Period full stop. Decimalization, SOX, poor-quality research have taken their toll. A Facebook here, Google there does not make a market.

Impact of Historic Alibaba IPO

Highlights:

  • Respondents came back with a resounding ho-hum in response to our open-ended question of “How, if at all, has the record-setting public offering from Alibaba changed your outlook on the tech IPO market? On the tech M&A market?” More than 75% of the nearly 80 relevant responses in this section concluded that the Alibaba IPO will have little or no impact, primarily because it was such a one-off kind of company and transaction (we saw about 30 uses of terms like “outlier” or “unique” or “one-off”). Only 6% expect to see any significant impact, with the remainder predicting a modest positive or negative impact.
     
  • Despite seeing the largest tech IPO in history in late Q3 (Alibaba’s $25bn raise), respondents didn’t necessarily see momentum carrying through for new offerings in the final quarter of this year. Four of 10 (40%) forecast that Q4 activity would be lower than the first three quarters of 2014, compared with 33% who said the pace would hold steady and 27% who said it would increase.

Selected Comments:

Too much of a one-off – no real impact

  • The Alibaba IPO was a “one off” special situation that will have little impact on the tech IPO market and no impact on the tech M&A market.  
  • No change – one-off Chinese monopolies are outliers.
  • No impact. Alibaba is a very unique story, in that it had the ability to leverage a domestic company (Yahoo!) for its notoriety in the U.S., while uniquely leveraging the controlled market opportunity in China. There are not many other similarly situated companies.

Some positive impact

  • It’s a positive sign. There is investor appetite for good companies.
  • A validation for sure of the global nature of C2C/B2C commerce platforms, but aside from creating high-potential M&A energy at one market leader, the exception does not define a rule ... as yet.
  • Alibaba is very unique. Does not change the outlook much, other than for Alibaba, SoftBank and Yahoo (got lots of $$$ to spend).
  • Positive for tech M&A market – new buyer at the table.

Some negative impact

  • It’s a demonstration that all deals can find a zealous buyer if they have enough sizzle. Unfortunately, it also incites a herd mentality, which seems to pervade the VC/M&A world.
  • [Demonstrates that the] market has an appetite for vague valuation models.
  • Unique situation, but indicative of froth and a nearby top.
  • The smart money has been joined by the desperate and trendy money. Historically, this is not a healthy development.
  • Reduced capital allocation to other tech companies in the short term, no material impact anticipated in the long term.
  • Alibaba may have taken the steam out of other issuances for a while.

If Alibaba had tanked, we might be singing a different tune

  • If we had had another “Facebook” it would have been bad, but because we did not, no real effect.
  • Alibaba may have temporarily paused the IPO tech market as public investors waited for Alibaba. With the success of the Alibaba IPO, I would expect it to have a positive impact generally speaking, but … even a company as large as Alibaba cannot carry the IPO market if a slew of lower-quality companies attempt IPOs. That said, an unsuccessful IPO [of Alibaba] could have had a real chilling effect on the IPO market.

Impact of IP Litigation

Highlights:

  • We asked respondents to indicate the extent to which they disagree or agree with selected comments about the impact of litigation (or threats thereof) over significant IP assets. The highest agreement was related to the comment that IP litigation “requires significant additional diligence and associated cost, which must be considered in deciding whether to proceed.” The comment seeing the lowest level of agreement was: “Deal structuring (earnouts, relatively large escrows or holdbacks) can reduce the risk to manageable levels.”
     
  • About 40% of respondents said they have not personally been involved in actual or threatened claims over significant IP assets in recent years.

Selected Comments:

  • The devil will always be in the details, but pending or threatened litigation related to IP that represents core assets/value of a target company is a clear red flag. While factoring this risk into price and being creative on deal structure – all else equal – a target with clean/clear title to its IP will be more desirable than one that has pending or threatened litigation.
  • Every situation is different, and there are some situations that are very binary such that an earnout or escrows are not sufficient to mitigate the risk. For small companies in which the IP is one of the primary reasons to acquire the company, litigation can kill the process.
  • For early-stage tech companies, commanding a premium, IP is what the buyer is acquiring. So every instrument to guarantee success and minimize risk is required.
  • Buyers hate all ongoing litigation and legal risk, [and] will only put up with this for prized assets. For most selling companies, it will take them out of play.
  • Not a huge concern as deals can typically be structured to indemnify the Buyers from in-process litigation.
  • Meh. It has always been out there. Much ado about nothing.

Views on Antitrust Review and Regulation

Highlights:

  • We asked respondents to indicate the extent to which they disagree or agree with selected comments about the impact of antitrust review and regulation in M&A. The highest agreement was related to the comment that IP litigation “should be at least in part the target’s concern/responsibility,” and the lowest level of agreement was with: “Presents a major risk of forgone or terminated transactions.” More than one-third of respondents agreed that antitrust is “generally not a concern.”
     
  • When asked about their view of the current antitrust/regulatory environment, more than half of respondents said it is just about right, with another third feeling it’s too tough, and a few (15% of total) saying it’s too lenient.

Selected Comments:

The impact of antitrust

  • Both buyer and seller have to be aware of the issues and avoid communications that could damage the close. Bazaarvoice / PowerReviews is a classic example of where things went really wrong, yet for a relatively small transaction.
  • We advise companies that are worth ~$100-500m in enterprise value, antitrust seldom comes to bear on that size of deal.
  • The only impact in most cases is how much time it takes to get through the issues – not whether or not you get through – the vast majority are resolved by selling off some assets.
  • This administration seems especially nervous about a/t “issues” raised by third parties, and takes a long time to clear.
  • We have seen more concern from Europe than either Asia or North America.
  • U.S. and Europe easier, but China the big unknown that didn’t exist five years ago.

The current regulatory environment is too harsh/too lenient/just right

  • Regulators cannot keep up with the markets they regulate. The market forces are too dynamic to regulate effectively. IBM and Microsoft are two examples of companies that were weakened significantly by DOJ/FTC, and to what end ... to create the Googles of the world. T-Mobile and Sprint should be allowed to merge to create a genuinely viable competitor to AT&T and Verizon.
  • I’d say both too tough and too lenient. It seems to be selectively applied in areas for political reasons rather than for good economic/market-driven reasons.
  • It’s not to protect competitors. The law is for the protection of consumers. It’s probably about right.
  • Regulators do not understand the markets they regulate. As a result, deals are susceptible to inappropriate scrutiny.
  • Cable and Internet litigation will dictate ownership of footprints for the foreseeable future.

Non-U.S. environments are different

  • China is the issue.
  • Mostly [seeing issues] in APAC.
  • International approvals are much longer than they used to be.
Close

Feedback

Disclaimer

Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.