M&A Market Analysis: Which Way From Here?

By on February 18, 2015

singapore-404284_1280The M&A market has been on a roller coaster ride. In the fourth quarter of 2014, both M&A deals and VC investing have shown some indications of cooling from their stratospheric heights earlier last year.

At the same time, public markets have been volatile with international markets in turmoil and oil prices collapsing. It remains to be seen how public markets will affect the M&A market. Finally Exitround has its own  data to indicate potential future directions of the market. In this Market Analysis we review various data sources and provide some thoughts on what that tells us about where the M&A market is heading.

M&A Deal Flow Slows 
M&A deal flow cooled slightly in Q4 2014 after a hot Q3 but still remained very active. In Q4 2014, the number of VC-backed M&A deals were down 23% to 102 from 132 in Q3 2014, according to Dow Jones VentureSource. It will be interesting to see if the number of deals picks back up in Q1 2015 or whether buyers remain cautious. Despite the drop in number of deals, total M&A dollars spiked by a stunning 60% to $32.3 billion in Q4 2014 from $20.1 billion in Q3 2014–mostly due to Facebook’s Whatsapp $19 billion acquisition.

With the benefit of Facebook’s massive acquisition, the fourth quarter was the largest by aggregate deal value since the dot-com era of Q2 2000 and the second strongest quarter since 1994, according to the National Venture Capital Association.

For the full year of 2014, it was a strong year for M&A. While the data was skewed somewhat by Facebook’s Whatsapp acquisition, the full year still had $26.5 billion in total deal value, up 57% from all of 2013 and still the largest M&A deal value since 2007, according to NVCA.

The largest deals of the quarter came via Facebook’s $19 billion purchase of Whatsapp, Johnson and Johnson’s $1.75 billion purchase of Alios BioPharma Inc. and Rakuten’s $981 million acquisition of Ebates.

Worldwide, 2014 was a strong year as there were 58% more global tech exits in 2014, compared to 2013, according to CB Insights. In particular, large buyers were active looking for major deals to create new divisions or fill major product holes. There were 32 billion-dollar exits (“unicorns”) in 2014, up from 17 in 2013.

Yet while the largest focus remained on massive “unicorn” deals, most tech acquisitions remain substantially smaller. About 44% of 2014 acquisitions occurred for a startup whose last round was a seed round or Series A round, according to CB Insights, which fits with trends Exitround has seen. In addition, 73% of tech company exits in 2014 involved sellers who hadn’t raised any institutional venture funding. With the growing strength of angel investing and crowdfunding platforms, more and more entrepreneurs should be able to build and sell successful companies without institutional funding.

The start of 2015 has seen a number of significant deals but not many approaching the massive deals seen last year. For example, Amazon acquired Annapurna Labs for a reported $370 million. In a remarkable example of non-tech companies buying technology in order to compete, Under Armour acquired MyFitnessPal for $475 million.

Venture Capital Funding
Meanwhile, VC funding for startups has moderated slightly but has also remained very active. The number of venture investments dropped in Q4 2014, but dollars invested still increased. VCs poured $13.8 billion into 824 US deals in Q4 2014, which was up 24% in dollars, despite deals dropping 12% from the prior quarter. Seed deals dropped 40% from Q3 2014, and 56% from the year-ago period.

First and second round deals also dropped, while late stage deals were roughly flat. Median deal size increased $6.8 million in Q4 2014 from $5.0 million in Q3 2014 and $4.18 million a year ago. Median pre-money valuations also continued to stay hot, as a reflection of the hot VC funding market, increasing to $45.6 million in Q4 2014, up from $35.0 million in the prior quarter and $21.63 million in the year-ago quarter.

This strong funding at the late stage is a result of large investors coming in at the pre-IPO stage, looking for public market investments before companies go public. The decrease in seed and early stage deals does present questions about the future direction of the market. If VCs start to pull back from early stage and invest more in later stage deals, that could indicate a problem for earlier stage companies. At the same time, the number of seed investing firms has continued to increase and angel investing has grown with sites like AngelList, so entrepreneurs should still have opportunities to raise funding–at least at the early stage.

Public Markets
The public markets have seen a significant increase in volatility this year. The crash in oil prices and instability in Greece and the Euro region has sent shockwaves through the markets, though they have recently recovered somewhat.

If volatility continues to increase and equity markets drop, as some analysts predict, this could filter down into the M&A and startup market. We could then see some pullback in M&A, particularly among mega deals as buyers wait out the uncertainty. Venture funding could also (temporarily) slow somewhat in a down market scenario. Still, we expect M&A to remain relatively strong this year, particularly in the boutique side of the market, as large companies flush with cash continue to look for innovation, products and talent.

Exitround Data
The Exitround marketplace has seen a strong buyer demand for technology companies in certain sectors. These areas included mobile, big data, adtech, enterprise software and social media. In terms of technology, buyers were most interested Javascript, Ruby, and iOS and Android, as well as Hadoop, Java and MongoDB.

In terms of locations, the most popular companies came from technology centers including the San Francisco Bay Area and New York City. Other areas with strong demand included: Los Angeles, London, Boston, Toronto, Denver, Austin, Chicago and Seattle.

The number of buyers signing up for Exitround has also continued to increase as they look to find companies to fill critical needs in product, IP or talent.

For more on recent data from Exitround, see this post on what buyers are looking for on Exitround.

Conclusion
The M&A market remains active but has slowed down–slightly. But there are macro trends that will keep M&A robust this year. Major corporations, driven by needs for new product, IP, and talent, are increasingly looking for technology companies to acquire in order to compete in today’s market. As a result, we expect to see continued strong M&A activity in the absence of any major market shocks. Even with inevitable market volatility this year, the boutique sector of the market will stay extremely busy this year.

photo credit: joinbrand/pixabay

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