Once so-called ‘new technology’ companies are now playing an integral role in the ‘real economy’ and dominant technology sector players are taking a more aggressive approach to acquiring products, capacity and market share through merger and acquisition (M&A) activity. A swathe of recent global M&A deals have signalled the need for Australian companies to be ready to respond to interested acquirers, whether of a ‘friendly’ or ‘hostile’ nature.
Recent ‘big ticket’ deals internationally include Western Digital’s acquisition of Hitachi Global Storage Systems (storage business) for $US4.3 billion, Qualcomm’s announced purchase of Atheros (semiconductor technologies) for $US3.1 billion, Intel’s $US1.4 billion acquisitions of Infineon (wireless solutions) and $US7.7 billion acquisition of McAfee (embedded security solution), and Google’s acquisition of Motorola Mobility for $US12.5 billion.
US targets alone accounted for 851 deals, totalling $US54.7 billion in announced deals. The internet, software and hardware sectors were most active in the first quarter of 2011, accounting for nearly 81 per cent of both the volume and value of deals, dwarfing semiconductor and IT services plays.
One of the driving factors behind the trend is large companies seeking to fill technology gaps. Although some deals, such as Carlyle Group’s $US3.9 acquisition of telecommunications infrastructure company Commscope, lend weight to the growing importance of technology infrastructure as more users adopt smart devices or move to Cloud services, placing greater demand on communication networks.
Australian technology companies typically offer quality intellectual property, strong existing client relationships and skilled staff. Technology developed around mining, agricultural and financial services is often world leading and may offer strategic benefits for acquirers.
Although partially hidden by the current ‘noise’ from the financial markets, a sample of recent deals illustrates the level of reinvigorated interest in the local technology sector. These include: Accel Partners’ $US35 million venture capital investment in 99designs Limited and other recent investments in Atlassian Software and OxForex Limited; eServGlobal Limited’s sale of USP assets and business to Oracle for $US114 million; Onthehouse Holdings Limited’s $55 million IPO on the Australian Securities Exchange and its simultaneous acquisitions of Console and PortPlus; InfoHRM Pty Ltd’s sale to Successfactors Inc for $US40 million; and BSD Robotics sale to Luminex Corporation.
While attractive premiums are potentially available, with examples ranging from 30 to 60 per cent, there are still timing and execution risks attached to public takeovers. Recent trends suggest a success rate of about 55 per cent for announced deals.
Foreign bidders may have expectations as to what sort of deal protection can be ‘guaranteed’. The issue of ‘break fees’ is often a contentious negotiation point; Australian rules impose stringent limits on such fees and other ‘lock-up devices’. To maximise opportunities as they arise, Australian technology companies must:
- Be ‘due diligence ready’ at all times
- Ensure all intellectual property protection is up to date
- Understand value and be able to respond effectively to asking price
- Have a track record of quality management and disciplined financial reporting (including recognition of revenues)
- Engage experts who understand the preferred deal structures of foreign bidders and the specialised nature of tech companies
- Understand the merits of different transaction structures for vendors: Private treaty sales, takeover bids and schemes of arrangement.
There are currently fewer global opportunities and Australia has a high success rate for takeover deals. Many cashed-up bidders are seeking to fill product gaps or take advantage of infrastructure opportunities. Astute companies in the Australian technology sector will be well placed to take advantage of M&A opportunities that may arise.
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