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Tech M&As Expected to Slow: Report

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After surging to record highs last year, mergers and acquisitions in the technology sector are expected to cool in the months ahead, with the bulk of deals driven by the corporate world’s ongoing shift to cloud computing, as well as new data management needs created by the Internet of Things, a new report says.

The slowdown comes after corporate technology buyers raced to close deals ahead of expected weaker economic growth, according to 451 Research, a New York-based tech market analysis firm.

Among roughly 40 corporate development executives it surveyed, 28% said they believed M&A activity would decline in 2016, the highest share since at least 2008. Only 31% felt M&A activity would pick up, down from 58% in 2015. Last year just 6% expected activity would decline. Survey respondents included executives at software firms, hardware and semiconductor companies and security services, among others.

The report identified roughly 300 tech companies as potential M&A targets in the year ahead, with 13 private firms poised to file initial public offerings.

That’s a far cry from the flurry of more than 4,000 tech M&A deals in 2015, which pushed the full-year total value for M&A deals in the sector to $597 billion, surpassing the previous record by 40%, the report said.

Beyond the volume of deals, as many as 84 tech industry acquisitions last year were each worth more than $1 billion, the highest share in over a decade, the report said. They included Dell Inc.’s $67 billion purchase of EMC – the largest-ever transaction in IT.

Much of the consolidation, the most dramatic “since the Internet bubble burst in 2000,” reflected ongoing moves by large enterprise technology firms to reinvent themselves for the cloud era, said the report. Microsoft Corp.MSFT +1.44%, for instance, announced 20 deals in 2015, doubling the average number of deals the software giant struck in recent years. Likewise, International Business Machines Corp.IBM +1.28% announced 15 deals, tripling the number from 2014.

So why the expected slow down?

Analysts say the burst in deal making – which came in the second half of the year — now looks like the signs of a late-stage M&A cycle, “when growth rates are tailing off and companies sense that financial and economic conditions aren’t likely to be as favorable in the future,” as 451 Research puts it.

As CIO Journal reported earlier this month, weaker economic growth and volatile global markets are already prompting many firms to cut IT hiring and spending plans.

The slump in initial public offerings for new tech firms is also weighing M&A activity, analysts say. Of the eight IT-focused tech firms that went public last year on U.S. exchanges, half were valued lower after their IPO, than they were as private firms.

Brian Levy, a partner at PricewaterhouseCoopers LLP, said soaring valuations for these early-stage tech firms contribute to slower M&A activity by increasing their risk profile and widening the spread between buyers and sellers.

“Once the market gets comfortable with the corrected valuations, the deal market will continue,” Mr. Levy told CIO Journal.

PwC, which doesn’t expect M&A activity to slow significantly, sees cloud, security and IoT driving deals in 2016. “We have seen an increasing trend over the past few years for non-tech companies to acquire software and IT services companies to bolster their product offerings, and expect that trend to continue for years to come,” PwC said in a research note earlier this month. At the same time, it said, “large tech companies and startups alike have made significant investments into cloud.”

Microsoft on Wednesday agreed to acquire Xamarin Inc., a maker of software development tools, for $400 million to $500 million, a person familiar with the deal told The Wall Street Journal.

Likely activity in the months ahead include IBM’s anticipated purchase of GitLab, a code-sharing service, aimed at boosting its presence in the development tool chain, according to 451 Research.

Others include BMC Software Inc.’s purchase of Graylog, an open source log management platform, and VMware Inc.VMW +2.66% buying HashiCorp., maker of software that automates the way data center applications are developed, deployed and managed, the report said.

Paul

The author Paul