The sharp decline in leveraged buyouts will curtail technology industry acquisitions in 2008, although corporate buyers should pick up some of the slack in doing deals, according to a new report from 451 Group.
More than two-thirds of technology bankers expect to see an increase in mergers and acquisitions and initial public offerings in 2008, the San Francisco research firm found. However, a significant number are more pessimistic, predicting that industry dealflow will be slower than last year.
“We’ve had four years of record levels of M&A and finished 2007 near a half trillion dollars,” said 451 Group analyst Brenon Daly, who authored the report. “But 2008 is not going to continue that record run–the transaction guys aren’t seeing levels anywhere near last year.”
According to the report, as of November, far fewer bankers reported increases in tech banking mandates compared with deals in 2006, while the number of bankers who showed a decline in mandates jumped compared with the prior year.
“Bankers are optimistic by nature, so if there’s a dip in the optimism on their front, it’s noteworthy,” Daly said.
The decline in tech acquisitions is mainly due to the withdrawal of private equity firms from company auctions amid the ongoing credit crisis, which has all but frozen the amount of debt available for big buyouts. According to 451 Group, 56% of tech bankers expect the dollar value of private equity deals to be the same or less in 2008 compared with last year, with 30% expecting a drop of at least 10% to 25%.
As usual, though, where some see gloom and doom, others see opportunity.
“If you want to focus on private equity and private equity-backed businesses looking to do tuck-in acquisitions and needing to revisit their lenders, the market has obviously changed for them,” said Allen Cinzori, managing director at Software Equity Group, a San Diego software M&A advisory firm. “But strategic buyers are continuing to look at deals we’re presenting to them, and that’s across the board from the largest of the software companies to smaller companies.”
Cinzori pointed to Armonk, N.Y.-based IBM Corp.’s $5 billion acquisition of Cognos Inc. in November and Walldorf, Germany-based SAP AG’s $6.8 billion purchase of Business Objects SA a month earlier as examples of strategic buyers pulling the trigger on big deals despite the credit crunch.
The 451 Group report also shows that tech companies expect dealmaking to pick up this year. Based on a survey of 64 corporate dealmakers in October, the firm found that respondents were six times more likely to expect an increase in the number of deals in 2008 rather than a downturn, with roughly 4 out of 10 saying they plain to maintain their current pace.
In addition to less competition for acquisition targets, weakness in the stock market is making more properties attractive for cash-rich strategic buyers. “I see no falloff in demand from the strategic buyers I’m talking to,” Cinzori said. “There is still desire and appetite in the marketplace.”
That could all change, the analyst noted, if the U.S. economy continues to worsen.
“If a recession comes, all bets are off,” Cinzori said.