Amid slump, corporate acquirers give strongest M&A forecast since the recession

Despite a lackluster year for tech M&A in 2017, corporate acquirers overwhelmingly forecast that their companies will be looking to shop again this year. More than six out of 10 (62%) respondents to the annual 451 Research Tech Corporate Development Outlook Survey indicated that their firms would be more active with acquisitions in 2018. That was the most bullish outlook since the end of the recent recession, and came in over three times higher than the 18% of corporate acquirers who expect their companies to step out of the market.

The company-specific outlook, which came from major acquirers across the tech landscape, is far more buoyant than their view of the broader M&A market, however. Looking ahead at the overall dealmaking environment for corporate buyers, only slightly more than four out of 10 respondents (43%) said it would be more favorable in 2018 than it was in 2017. On the other side, fully one-quarter (25%) forecast that general tech M&A conditions would deteriorate this year.

Although the broad-market outlook – with slightly more than four out of 10 respondents indicating an improved M&A environment in the coming year – ticked higher from last year's survey, it is still lower than the two surveys before that, when tech acquisition activity did indeed hit multiyear highs. In those two previous 451 Research Tech Corporate Development Outlook Surveys, slightly more than half of the respondents forecast a favorable environment for their fellow strategic buyers. In both 2015 and 2016, spending on tech deals topped $500bn for the first time since the internet bubble burst, according to 451 Research's M&A KnowledgeBase.

Rivals to the throne
One of the reasons for the dimming outlook for corporate acquirers has been the seemingly unstoppable rise of rival buyers from private equity (PE) firms. These newly assertive acquirers, which are currently sitting on record amounts of money, put up more prints last year than any year in history, according to the M&A KnowledgeBase. Corporate buyers, which have sometimes found themselves outbid in recent deals by financial acquirers, overwhelmingly expect buyout shops to be even more aggressive in 2018.

Specifically on the PE rivalry, a record two-thirds of corporate acquirers (64%) said they expected competition with buyout shops for deals to sharpen in 2018. That topped the previous record from 2016, and jumped markedly from last year's survey, when just 42% of respondents forecast an increase in competition. On the other side, the percentage of corporate respondents who said buyout shops would be less competitive in the coming year dropped to just 8%, half the level from the previous survey.

Underscoring just how powerful these PE firms have become, for the first time in the 11 editions of the 451 Research Tech Corporate Development Outlook Survey, respondents said financial buyers will offer more competition than strategic acquirers. (In the most recent survey, 64% of respondents indicated that PE would be more competitive in 2018, compared with 59% of respondents who said that about their fellow corporate buyers.)

The shift in buying power, which has swung billions of dollars in spending between the two groups, has already come through in actual deal flow. The M&A KnowledgeBase shows PE shops announced as many tech acquisitions in 2017 as companies listed on the NYSE and Nasdaq. That's a dramatic shift. As recently as the start of the decade, public companies were doing twice as many deals each year as their PE rivals.

Mind the gap
By historic standards, corporate acquirers had an unusually quiet 2017. That was particularly true for many of the large-cap giants that have typically set the tone in the overall tech M&A market. According to the M&A KnowledgeBase, the number of tech acquisitions by companies listed on the NYSE and Nasdaq dropped 5% in 2017 following an 11% year-over-year decline in 2016. Given that more than half of the respondents to the 451 Research Tech Corporate Development Outlook Survey work at public companies, including several of the big-name buyers, we asked what kept them out of the market last year. By a landslide, the main reason was valuations.

Of course, valuations perennially top the list of 'pain points' in our survey, as would be expected in any M&A-related discussion. However, a recent record number of corporate acquirers said negotiations around pricing snagged deals in 2017. Fully nine out of 10 respondents reported that trying to bridge the valuation gap was painful, with more than half saying it was 'very much' a pain point. Both of this year's responses around pricing were 5-10 percentage points higher than what we generally see in our annual surveys.

Looking ahead, the already difficult valuation negotiations will likely be even thornier in the coming year, according to our survey. Twice as many tech acquirers said they expect the valuation gap to widen than narrow in 2018 (47% vs. 24%). That's almost a direct reversal of the outlook from last year's 451 Research Tech Corporate Development Outlook Survey.

'The Art of the Deal'
Even though negotiations around pricing are looking difficult in 2018, corporate buyers mostly don't see the broader economic picture complicating the dealmaking process. That sentiment comes amid a generally favorable climate in the US of accelerating GDP growth and record high prices on Wall Street, among other positive indicators. (Note: 85% of survey respondents are based in the US.) In the survey, nearly four out of 10 respondents (38%) said the macro-economy didn't cause any difficulties in their M&A work, compared with one-quarter (26%) who said it did.

Contributing to the supportive overall climate for M&A, in the view of our survey respondents, are the policies of President Donald Trump, the coauthor of the 1987 business book, The Art of the Deal. By more than a two-to-one margin, corporate acquirers said President Trump's policies will help spur M&A in 2018. Specifically, 59% said the current administration will 'stimulate' dealmaking this year, compared with just 23% saying it will 'inhibit' dealmaking. That bullish outlook toward the White House around M&A is notable, given that Trump's overall popularity currently sits at historic lows.

Of course, much of that 'Trump rally' for M&A can probably be tied to the business-friendly tax package that the president championed. We were surveying corporate buyers just as Congress approved the tax plan, which will effectively swell companies' already substantial cash holdings by lowering the corporate tax rate and removing much of the heavy tax penalties on bringing profit held outside the US back home. Economists describe Trump's plan, which envisions $1.5 trillion in tax cuts, as the largest overhaul of the tax code in 30 years.

And the Golden Tombstone goes to...
Finally, as we do every year, we asked corporate development executives to look at the handiwork of their peers around the tech industry and pick the most significant transaction announced in 2017. For the first time ever, we have a tie: Intel-Mobileye, Cisco-AppDynamics and Broadcom's unsolicited bid for Qualcomm. (Strictly speaking, the Broadcom-Qualcomm pairing is far from finalized, particularly when compared with both of the other top vote-getters. Intel and Cisco announced and closed their respective multibillion-dollar acquisitions in calendar year 2017.) Still, the unprecedented logjam at the top is somehow fitting for 2017, a year that saw corporate acquirers put forward a record 12 nominees for the deal of the year.

Top vote-getter for 'most significant tech transaction'

2017 Tie: Intel-Mobileye; Cisco-AppDynamics; Broadcom-Qualcomm
2016 Microsoft's acquisition of LinkedIn
2015 Dell's acquisition of EMC
2014 Facebook's acquisition of WhatsApp
2013 IBM's acquisition of SoftLayer
2012 VMware's acquisition of Nicira
2011 Google's acquisition of Motorola Mobility
2010 Intel's acquisition of McAfee
2009 Oracle's acquisition of Sun Microsystems
2008 Hewlett-Packard's acquisition of EDS
2007 Citrix's acquisition of XenSource