Resurgent Deal Flow Should Be Viewed Within Context of Sluggish M&A Market

by Brenon Daly

To look at the recent performance of the Nasdaq, you’d hardly know that capitalism (as we know it) almost died a year ago. The tech-heavy index was largely unchanged on Wednesday but has posted gains for three straight sessions, having added 9% so far in September. That’s part of a longer run that has seen the Nasdaq tack on 35% since the beginning of 2009 and 70% since bottoming out in early March. In fact, the index is essentially where it was a year ago, before banks started going under, the credit market froze and the US government fired up its printing presses to give us all enough money to buy our way out of the recession.

The optimism that’s been boosting the equity markets is starting to carry over to the M&A market, with several signs from big-time buyers pointing to a return to health:

• Dell’s (DELL) recent reach for Perot Systems (PER) stands as the largest tech transaction in five months.
• Google (GOOG) inked its second acquisition in as many months, after being out of the market for nearly a year. (The search giant added reCAPTCHA last week after picking up On2 Technologies (ONT) in early August, its first purchase of a fellow public company.)
• Adobe (ADBE) and CA Inc (CA) announced their largest deals in four-and-a-half years and three-and-a-half years, respectively, in the past week.
• Microsoft (MSFT) grabbed a bucketful of small companies to add technology to its ERP division, a business that has largely been shaped by a pair of billion-dollar buys earlier this decade.

Of course, we need to consider this resurgence of deal flow in the context of an overall sluggish M&A market. With a week and a half left in the third quarter, spending on deals is running at just $28bn. While that would put activity roughly on par with where it was last year, it is only half of the amount of third-quarter spending in 2007 and one-third of the total in Q3 2006. Another way to look at it: the roughly $84bn that we’ve seen so far for all of 2009 is basically what we used to see in a single quarter during the boom years.

Q3 tech M&A activity

Period Deal volume Deal value Q3 2009 (through August 22) 672 $27bn Q3 2008 733 $32bn Q3 2007 825 $58bn Q3 2006 1,029 $102bn Q3 2005 811 $87bn

Source: The 451 M&A KnowledgeBase

Comments

[markfl:]

Like declines in the dollar, the emergence of some M&A interest from the groundhog hole represents a cautious desire to venture out from the bunker and see if it is safe to come topside yet. Nevertheless, the Q3 GDP report had better be in the vicinity of 2.5% or better in about one month (around Halloween), or many investors will get spooked.

There are critical turning points coming that will determine the driection of the economy and markets for years to come. The endless and frequently unproductive green/brown shoots debate will end and the hard analysis will begin. The economy is poised to thrive or crawl between Nov. and Jan., and one of several big life signs will be the BLS report in 2 weeks, then GDP, then Nov. and Dec. monthly reports that had better show a solid and sustained upward trend--or else.

Sep 24 06:13 AM

[FAFUFNIK:]

Your remarks about the proposed sale of ON2 Technology to Google has not been approved by th stockholders---over 50m shares have already been pledged to vote no on the message boards. There are more than one lawsuit active to stop the deal. Longterm stockholders have been organizing since the deal was announced on August 5th--- less than one day before the best quarterly report in history for ONT. and a barrage of unanswered complaints to the acting ceo at the conference call the following day.
Please adjust the language of your release accordingly to be fair , honest and accurate to the market at large. thanks. gcvlahos@comcast .net

Sep 28 11:05 AM