Tech M&A plunges in 2nd quarter

The technology industry may be weathering the worst of the economic storms, but tech M&A is suffering. The total enterprise value of deals in the sector in the second quarter was roughly $31 billion, down 59% from nearly $75 billion in the year-ago quarter, according to a new report from Updata Advisors. There were 194 deals in the quarter, compared with 256 transactions in the previous quarter and 263 in the year-ago period. Deal pricing is also feeling the pinch, with median multiples of enterprise value to trailing 12 months revenue falling 8% from a year ago.

Why the sharp drop? Against the slumping macroeconomic backdrop, buyers are being more patient and selective in their purchases, especially given the growing number of targets, the investment bank says. The falling stock price of public companies also is making potential acquirers think twice about using their fading shares to fund deals (see chart below). Although companies with strong growth and cash flow remain in demand, they're not drawing the big, and arguably overpriced, offers common in 2007, a banner year for M&A.

Not surprisingly, smaller businesses are faring the worst. "It is the smaller companies with flat or declining revenues and cash burn that are experiencing the pain of the distressed economy reflected acutely in their sell-side M&A processes," Updata says. "Targets with these characteristics are finding limited interest and tend to be more appropriate for boutique buyers focused on distressed targets--as a result, the spread between valuations for these types of companies versus fast growers has widened."

The bleak numbers echo findings presented by UBS Investment Bank at their technology conference this week in Silicon Valley. Bankers at the event said they expect fees from technology deals to plunge this year. UBS estimates the global fee pool for all tech deals this year at about $3 billion, or roughly half the $6 billion earned in 2007.

Key trends to watch for amid the tougher M&A environment, UBS says, are increased dealmaking by strategic buyers; more midmarket transactions; more hostile deals and shareholder activism; rising cross-border shopping; and, when credit markets improve, the return of financial sponsors.