Declining unicorn valuations may only drive the deal making frenzy to higher heights. Could be a great environment for the prudent - and ruthless. JL
The Financial Times reports:
The industry’s short life cycle sends chief executives on desperate shopping sprees for growth. History suggests that most acquirers in 2015, a record year for deals in the sector, will not be fortunate
“This ain’t no technological breakdown,” sang Chris Rea. “Oh no, this is the road to hell.” Tech acquisitions usually look a lot like both. Aswath Damodaran, NYU Stern professor, blames the industry’s short life cycle, which sends chief executives on desperate shopping sprees for growth.
Yahoo is the most prominent recent example, but its deals are too small to feature on a list, compiled with Dealogic data, of the biggest tech acquisitions in the past 10 years. Hewlett-Packard has two disastrous entries: the $13.3bn acquisition of EDS, which led to a $8bn writedown, and the $11.1bn acquisition of Autonomy, followed by an $8.8bn writedown.
Three on the list comprise a different category: private equity problem children. First Data was bought by KKR for $28bn in 2007 and floated this year. KKR still owns shares and might achieve a modest profit, but it has taken eight years, an equity injection and new management to arrive at that unsatisfying possibility — and the company still has $21bn of debt. SunGard and Freescale, both sold on this year, have also left private equity investors well short of a decent return.
Vivendi’s $9.8bn acquisition of a 52 per cent stake in video games maker Activision in 2007 is sui generis. It sold almost 90 per cent of its stake for $8.2bn in 2013, and Activision’s stock has since risen 130 per cent.
Some transactions are too recent to judge, but look richly priced enough to cause problems at some point. Facebook’s $22bn acquisition of WhatsApp in 2014 represented a fantastic multiple for a company with just $10m in revenues. SAP acquired Concur Technologies in 2014; its former CEO, now with the German company, says he could not turn down a price that equated to 10 times forecast revenues. There is also the problem of tracking deal performance within very large companies. Skype is no longer visible within Microsoft, for example, almost five years after being bought for $8.5bn. At least there has not been a writedown. Dell’s $21bn buyout by founder Michael Dell and Silver Lake in 2013 remains hard to judge, but the fact that Dell feels able to take on the biggest-ever tech acquisition — the $60bn purchase of EMC — suggests it is not in dire straits. Dell might just defy the tech deal jinx. History suggests that most acquirers in 2015, a record year for deals in the sector, will not be so fortunate.
Email the Lex team at lex@ft.com
What happened next: major technology takeovers
Date Size ($bn) Target Acquirer Outcome 2007 27.7 First Data KKR 2015 IPO 2014 22 Too soon 2013 21.1 Dell Michael Dell & Silver Lake Dell agreed to buy EMC for $64bn in 2015 2006 17.6 Freescale Blackstone, Permira, Carlyle, TPG Sold to NXP in 2015 for $16.8bn 2008 13.3 EDS Hewlett-Packard $8bn writedown in 2012 2005 11.8 SunGard Silver Lake, Bain Capital, Blackstone, Goldman Sachs, KKR, Providence Equity, TPG Sold to FIS in 2015 for $9.3bn 2011 11.7 Autonomy HP $8.8bn writedown in 2012 2007 9.8 Activision (52%) Vivendi Sold bulk of stake for $8.2bn in 2013 2014 8.6 Concur SAP Too soon 2011 8.5 Skype Microsoft Hard to know Source: Dealogic
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