Tech M&A Sets Record in 2016

Global technology merger and acquisition (M&A) deals reached an all-time record of $466.6 billion in 2016, driven in large part by the semiconductor industry, according to EY’s Global technology M&A report: October-December 2016 and year in review report. Digital transformation, led by cloud, mobile, social, data analytics and the Internet of Things (IoT) technologies, contributed to the highest value of deals recorded in the industry and a two percent increase over the prior record set in 2015 of $459.6 billion.

What’s going to drive deals in 2017? EY analysts put artificial intelligence and machine learning at the top of the list.

"Massive disruption from cloud, mobile, social and big data analytics technologies drove global technology M&A to all-time value highs in 2016 and will remain strong drivers in the year ahead. But companies should prepare for new disruptions, including artificial intelligence and machine learning, which could push deal-making even higher late in the year and in 2018,” said Jeff Liu, EY Global Technology Industry Leader, Transaction Advisory Services, in a statement.

The report also finds the deal value in the fourth quarter of 2016 dropped 38 percent year-over-year (YOY) to $117.2 billion. In addition, the full-year deal volume declined five percent in 2016 to 3,796 deals. There was also a seven percent sequential drop in the fourth quarter to 844 deals, which was the second consecutive quarterly decline since 2012.

One of the biggest winners in 2016 was the IoT space. The value of IoT acquisitions tripled in 2016 to $103.4 billion with connected car deals accounting for 55 percent of the value.

"The second-half slowdown in global technology M&A deal volume suggests tech companies are approaching a deal-making plateau. But with digital disruption still in its infancy and the extraordinary growth of IoT-related deals, we don't expect this dip in volume to translate into a long-term decline in deal-making,” Liu stated.

The report also reveals that 2016 was a record year for semiconductor consolidation driven by IoT technology, non-tech buyers, cross-border deals, and private equity (PE) buying. Per the report:

Semiconductor targets set a new aggregate deal value record of nearly US$125b in 2016, as IoT and automobile-driven deal-making that arose in 2015 gained momentum.
IoT deal volume increased 30% to 221 deals for the year and deal value tripled (+203%) to US$103.4b. Connected car-driven deals accounted for US$57b (55%) of total IoT deal value.
Non-tech buyers acquired 23% of 2016 all-deal aggregate value (up from 12% in 2015). This increasing deal competition coming from buyers outside of the technology sector may be one of the factors supporting high deal valuations.
Cross-border deal value set a new annual record in 2016, marked by a 147% YOY increase to US$67.8b in 4Q16 and a 63% increase for the year to US$208.2b.
PE buyers had their fourth-highest quarterly deal value ever in 4Q16 at US$20.8b and also set a record for annual aggregate deal value with US$90.1b, up 61% YOY.

Although the number of mega deals dropped from eight in 2015 to four in 2016, it equals 12 in the last two years compared to only six in the previous decade, according to EY. The report also reveals that three of the four mega deals in 2016 were valued at about $10 billion driven by the business value of data, and in two cases, the role of IoT in extracting data.

The two largest mega deals – Qualcomm and NXP and SoftBank Group and ARM – positioned buyers to benefit from IoT growth particularly automotive for Qualcomm-NXP. The other two mega deals included Microsoft’s acquisition of LinkedIn and a consolidation deal between analog IC makers Analog Devices Inc. and Linear Technology. The report also noted that Analog Devices acquired IoT-related technologies in at least three other deals.

The semiconductor industry set a new value record of nearly $125 billion in 2016, driven by IoT and automotive, with three of last year’s mega deals recorded by semiconductor companies. As a result, EY thinks “it’s likely such big-bet semiconductor deals will continue in 2017.”

In total, there were 114 deals targeting semiconductors in 2016, which is down from 117 deals in 2015. However, the aggregate value rose 21 percent to $124.9 billion. Semiconductors represented 11 of 92 deals last year valued at $1 billion or more.

The report also finds that the IoT drove 24 semiconductor deals in 2016 at a value of $81.2 billion. Two of the IoT deals - not focused on connected cars – exceeded $1 billion, including one for micro-electromechanical systems (MEMS) technology used for motion sensing mobile applications and the other focused on microcontrollers and wireless connectivity chips.