Over the past years, the technology industry experienced an overwhelming volume of M&A activity. The following article aims at outlining the motivations behind this phenomenon and at identifying numerous disrupting factors. Microsoft’s acquisition of the professional social network LinkedIn, as well as Snapchat’s rebranding strategy and potential IPO in 2017 will serve as examples for latest activities in this highly dynamic sector.
Disruptive trends in technology M&A
Continued economic and consumer confidence triggered a record-breaking 981 technology deals in the first quarter of 2016, with a cumulative value of $77.1bn. Technology companies use M&A as an imperative strategy to improve operational efficiency and profitability, by acquiring new expertise and innovation. Additionally, cheap debt financing allows for corporate expansion with limited risk. The concept of globalization likewise facilitates M&A activity, as the exchange of information and transfer of capital are nowadays faster than ever before. We summarize in what follows various disrupting “trends”, or factors, which we believe will have significant impact in shaping the near future of tech M&A activity.
Leading handset manufacturers and OS vendors are releasing digital currency services such as Google Wallet and Samsung Pay, to offer mobile payment to a wider spectrum of customers. Samsung processed an overall $30 million transactions within the first month of the release. Amazon, eBay, and other innovative newcomers are also revolutionizing the process of online exchanges, by connecting creators and consumers through user-friendly and reliable networks. Moreover, we see improvements in positioning intelligence and Artificial Intelligence (AI) tools as likely to represent key drivers of further acquisitions in the tech industry. In fact, by increasing levels of precision and awareness, location and proximity technology will soon give rise to an era of intelligent drones, self-driving cars and personal trackers. Finally, sports and gaming has reached a critical point of cultural importance and offers incredible growth opportunities. Microsoft’s $2.5bn acquisition of Mojang underlines the significance of virtual entertainment in the modern society.
Leveraging on new and more powerful hardware, connected healthcare is on track to improve self-care and remote diagnosis. Harnessing medical information from mobile applications and wearable technology allows for the extraction of actionable intelligence, representing a key driver for connecting the entire healthcare ecosystem. For example, IBM’s technology platform “Watson” establishes a new partnership between humanity and technology, by processing and revealing insights from unstructured data. We foresee this as being one of the major growth areas within the tech landscape in the coming years, driven by the need to eliminate healthcare inefficiencies and to encourage patient-centric healthcare provision.
Nevertheless, one must take account of the fact that these technologies generate new vulnerabilities and thus require comprehensive security analytics, rapid detection and in-process threat response. High profile hacks of major organizations, such as Target and JP Morgan Chase, demonstrate the magnitude of this issue. Lancope (now part of Cisco) and Caspida (now acquired by Splunk) aim to address these topics, by specializing in the monitoring of suspicious traffic patterns and protection of sensitive information. Furthermore, the internetworking of smart devices, known as Internet of Things, will definitely open a new front in this cybersecurity fight.
Microsoft’s bet on LinkedIn
On June 13, 2016, Microsoft announced it would acquire LinkedIn for a total cash consideration of $26.2bn, $196 per LinkedIn’s share. The purchase price represented a 50% premium on LinkedIn’s closing price on the day prior to the announcement, which led several analysts and investors to consider the transaction overpriced. On a fundamentals basis, the purchase price is in line with similar deals: Microsoft indeed paid 8.2x LinkedIn’s LTM Sales, which appears to be coherent with past transactions.
The rationale behind this acquisition must be traced back to the primary importance that Microsoft attaches to its cloud services, defined as the “World’s Leading Professional Cloud”. In fact, the synergy that the tech behemoth considers as crucial in this transaction is the complete integration of LinkedIn’s professional network into Microsoft’s professional cloud. This would lead for instance to an improvement in Cortana, the company’s digital assistant, and it would also bring a positive shock to revenues coming from advertisement, thanks to a “Social Selling” strategy.
The market was not enthusiastic about the transaction: despite LinkedIn’s shares jumped 47% on the day of announcement, Microsoft’s share price fell 1.8%. The reason why investors are skeptical about the acquisition is related to Microsoft’s M&A record.
Microsoft’s bittersweet acquisition story
Microsoft has been expanding significantly through external growth: founded in 1975, Bill Gates’ company made its first acquisition in 1987, when it bought Forethought (the developer of PowerPoint). Since then, Microsoft has reportedly made 198 acquisitions and has acquired stakes in more than 60 companies. Although successful on average, Microsoft’s biggest and most important deals have failed to realize the synergies that the parties were expecting in the first place. For example, the $6.3bn acquisition of the digital marketing company aQuantive in 2007 turned out to be a failure five years later, when Microsoft had to write the company down because it was not able to generate profits. Furthermore, in 2013 Microsoft acquired Nokia’s devices and services business to increase its competitiveness in the smartphone business. Once again, Microsoft had to write off $7.6bn in 2015 and admitted the failure of Nokia’s acquisition. The record of these and other failed multi-billion acquisitions is therefore one of the main drivers of the market’s skepticism towards the LinkedIn deal.
A look at Snapchat’s possible IPO
Snap Inc., the company behind the popular photo messaging application Snapchat, is on the news for preparing itself for an IPO as early as March 2017. During the last funding round in 2014, Snapchat—as the company was formerly known—raised $1.8bn and was valued at $18bn. The company plans to raise as much as $4bn at the public offering, which would value its enterprise at $20bn up to $25bn.
Snap is filing privately for the IPO under the Jobs Act, since it has less than $1bn in revenues, but the company has made public its user base, which consists of more than 150m active daily users— 50m of which are in Europe. In the most recent years, Snap has been engaging successfully in a process of capitalizing on its robust user base, and its advertisement revenues are expected to reach $1bn by 2018 according to research firm eMarketer. The main drivers behind Snap’s revenue generation are the Discover platform, in which advertisers can pay to have their content displayed on the Snapchat app, and the ads inserted between users’ Stories—a collection of pictures or videos users have posted publicly in the last 24 hours.
Moreover, the company has been expanding its products portfolio with the introduction of Spectacles, a hardware product consisting of sunglasses with an integrated video camera through which the user would be able to use Snapchat filters and other augmented reality services. In addition to the product line expansion, Snap has also opened offices in London, Paris, and Sydney as it is expanding internationally.
Snap’s rationale for the IPO might be related to its efforts in expanding the company’s presence in the augmented reality industry. In recent years, it has already been involved in multiple acquisitions of high-tech, niche companies, such as Vergence Labs, a start-up which developed glass frames that record video with the press of a button, which was acquired for $15m in 2014. With the introduction of Samsung’s Gear VR, and Facebook’s Oculus Rift, the resources Snap would obtain with the IPO might be essential for its positioning as a major player in the augmented reality industry, which is predicted by Deloitte Global to reach $1bn in 2016.
Furthermore, a successful float might represent a turnaround moment for the 2016 IPO market, as Snap would be the biggest company to go public on a US exchange since 2014. In the current year, only one major tech company has gone public, and the new issue market is down 35% in regards to capital raised compared to 2015. Nonetheless, Snap might lead the way of other companies known as “mega unicorns”, i.e. tech companies valued at $1bn or more, such as Uber and Airbnb, who are valued at $68bn and $30bn respectively.
[edmc id= 4203]Download as PDF[/edmc]