Are shareholders the losers in the current tech M&A push?
Although dealmakers in most industries are holding onto their cash in anticipation of more stable economic times, tech firms are doing the opposite – some with a lot more success than others.
By mid-April 2012, the tech industry had already seen mergers and acquisitions (M&As) worth $30 billion, which is the largest volume of deals since the first quarter of 2006. What’s more is the fact that a small number of firms, namely Facebook, Google, Oracle, Cisco and Microsoft, along with a few others, have been responsible for some enormous deals in terms of value.
There’s little doubt that tech firms are in a buying mood. The dynamic nature of the industry and its ever-changing consumer demands have meant that tech firms are desperate to achieve growth in order to keep up with their rivals.
Any tech firm worth its salt needs to ensure it has emerging technologies at its fingertips and to achieve this, M&A is often necessary. However, the industry’s uncertain nature is making it extremely difficult for businesses to make the right decisions in terms of which technologies and intellectual property to target.
Protectionism has, for some businesses, become as important as growth. For example, Google has bought up 1,000 IBM patents to ensure that it cannot be targeted legally for using the technologies. However, it has still left itself open to legal action from Oracle, which is claiming the development of the Android platform breached its Java-related IP.
Among all the M&A excitement it has also emerged that a large number of deals that have been done in recent years have added little by way of shareholder value.
A report released in January by McKinsey & Co shows that the tech industry has been the worst performing in terms of total returns to shareholders (TRS) over the past ten years.
Analysis of tech M&A over the past five years carried out by thedeal.com - using Dealogical and S&P’s Capital IQ, together with McKinsey’s TRS methodology – also found major problems with the market. The results showed huge disparities between individuals firms in terms of the number of deals they were involved with. There were also some clear winners and losers in terms of TRS.
Google was among the most prolific dealmakers over the past five years, undertaking 103 deals with a total value of $22 billion. However, it has also outperformed the TRS benchmark for its subsector by 3.7 per cent. This reflects its reputation for making numerous smaller, smarter deals that fit into its overall strategy well.
Yahoo! on the other hand has underperformed over the same period, by 12 per cent. It is another firm that has been highly acquisitive, but seems to lack the same sense of strategy when undertaking M&A and the results have been negative for shareholders.
With the latest Facebook M&A strategy proving controversial and the company preparing to go public, all eyes are now set on Zuckerberg et al. It was, after all, the CEO and founder’s solo decision to spend $1 billion on Instragram – the photo-sharing app with no revenue - earlier in the year. Only time will tell if decisions like this prove positive for Facebook’s future shareholders.