M&A Market Analysis: Preview For Second Half Of 2015

By on July 28, 2015

M&A activity cooled in the first half of this year after a banner year in 2014. Is this the start of a larger downturn or just a short-term blip? To better answer this question, we’ll look at three different (though overlapping) segments of the M&A landscape: VC-backed M&A, global M&A and non-VC-backed M&A.

VC Backed M&A
M&A for VC-backed startups totaled 86 deals in Q2 2015, down 26.5% from 117 deals in Q1 and down 30.1% from the year-ago period, per Dow Jones VentureSource. By dollar value of deals with a reported price, M&A dropped to $9.48 billion, down 16.1% from $11.3 billion in Q1 2015 and down 16.8% from $11.1 billion in the year-ago period. VC-backed M&A deals had the lowest number of deals in Q2 2015 since Q1 2003, per Thomson Reuters and NVCA.

The cooling in VC-backed M&A comes after several quarters of scorching hot M&A activity. In Q4 2014, total M&A deal value reached its highest level since 2000. For all of 2014, there were 455 deals, the highest level since 2012, per Thomson Reuters. Because last year’s numbers were so high, this year’s comps look particularly bad.

Median deal size of reported M&A deals was $93 million in Q2 2015, which was up from $55 million in Q1 2015 and $59.9 million in Q2 2014, per VentureSource.

Global M&A
While VC-backed M&A has dipped, global M&A overall has remained strong. Deal count was 3,993 in Q2 2015, down from 5,468 deals in the year-ago period. Total deal volume, however, was $445.4 billion, up 11.4% from $399.9 billion, and median deal size was $40.5 million, up from $30.7 million in the year-ago period, per Pitchbook. What this tells us is that large mega deals are still happening. These deals are to some extent less economy-sensitive than VC-backed deals—see for example CRRC Corp. ($26B) and Lorillard ($24.7B), which were the largest deals of the quarter.

Three Slices of M&A
Meanwhile, non-VC-backed M&A that we’ve seen at Exitround has remained extremely active. In this sector, large buyers have more leeway to acquire startups, because sellers do not have as many restrictions from investors. In addition, if we include in this segment companies that have only raised seed funding, there is even more activity. Companies that have slowed their larger VC-backed acquisitions have not slowed down acquiring smaller companies that are not venture-backed.

Unicorn Stampede
Valuations have reached historically high levels by a number of measures. There are currently 121 unicorns (billion dollar valuation companies), per CB Insights. With so many unicorns, many buyers are likely asking whether this is valuation inflation from investors. Whether the valuations are justified or not, on a practical level, acquiring these companies becomes more difficult as they reach these high valuations. This year there have been much fewer exits above $1 billion compared to last year, according to CB Insights.

Macro Picture
While the boom in Silicon Valley has continued, many have wondered whether this is a bubble and whether a correction or downturn is coming. Rising interest rates and international instability in Greece and China have caused stock market volatility. That may be causing some large buyers to wait on M&A deals, particularly larger ones—just in case they need more cash to weather difficult times ahead. At the same time, these same market factors are also causing private companies to raise larger rounds of capital at higher (unicorn) valuations, as noted above, creating an upward spiral, and making large companies less likely to purchase companies.

Moreover, the poor post-IPO performance of some recently listed companies may give buyers pause. The market capitalizations of some post-IPO companies have fallen below their last private market valuations—raising questions about whether those companies and others are being overvalued as private companies.

Whether this is a dip for two quarters or the beginning of a longer-term trend remains to be seen. So far, the drop in acquisitions appears to be mostly focused on venture-backed companies, and particularly larger venture-backed companies valued above $500 million. The smaller “boutique” M&A market still remains strong, as do the larger non-VC backed mega deals. Many buyers will likely wait to see how earnings perform and larger market factors shake out. From there, we’ll see more direction in the M&A market.

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