After selling software education company Care2Learn to Relias Learning in May 2013, Michael Wilkins (pictured) at Harris Williams & Co. says the sector is poised to see a lot of dealmaking in the sector. "M&A is definitely heating up as buyers and sellers are closing the valuation gap," says Wilkins, a managing director and head of Harris Williams' west coast technology, media and telecommunications practice. He also talks about the hottest acquirers in the market today and what to expect from the new- and old-guard players in 2014.
What's your forecast for middle-market tech M&A in 2014?
There has been a valuation gap between buyers and sellers. Sellers have often been expecting massive valuations, which has to do with the high valuations several companies going public were able to achieve recently. The realities of the market are starting to set in a little bit for sellers. Buyers are paying up for high quality assets, but they aren't paying unreasonable prices. We expect the gap between buyers and sellers to begin to close and deal volumes to be very healthy in 2014. We expect M&A volume will be up this year and while a major driver is closing the valuation gap, there are still fundamental deal drivers that will spur on activity: Corporates are flush with cash, private equity firms are increasingly willing to pay strategic type multiples for high quality platform acquisitions and the macro economic trends are pointing toward healthy growth.
What's fueling tech M&A?
A small handful of tech companies had initial public offerings with valuations that are tough to explain and it doesn't mean that private companies can mirror that. So the valuation gap is still an issue. But you do have some factors that are spurring on activity. The industry incumbents are looking to stay ahead of the innovation curve and they need to create and grow into new industries.
You saw this with Google's (Nasdaq: GOOG) $3.2 billion cash purchase of Nest Labs, Inc., which creates devices such as smart thermostats for the connected home. The bottom line is the need for innovation is always fueling tech M&A.
Who will be the big acquirers in tech?
In the Internet space it will be the old-guard companies like Google and Amazon.com Inc. (Nasdaq: AMZN) acquiring. That said, you do have some new-guard companies, like Facebook Inc. (Nasdaq: FB) and Twitter Inc. (NYSE: TWTR) that are becoming comfortable with inorganic growth. They've done a great job investing internally and focusing on organic growth, but having public currency will likely help catalyze growth outside the company so we are seeing new-guard companies increasingly putting dollars to work in M&A transactions. In the software subsector it's the IBMs (NYSE: IBM), Salesforces (NYSE: CRM), Adobes (Nasdaq: ADBE) and SAPs (NYSE: SAP) of the world that are looking to diversify as well as define share. From an acquirer perspective, there's a new- or next-generation group that has tapped the public markets and received significant valuations. That's a currency they didn't have before, and now that they are public, they have formulated their strategy and are going out to explore M&A in a more meaningful way than they have in years' past.
What's the difference between the tech companies' acquisition strategies?
Acquisition strategies vary on a case by case basis. For some, the M&A agenda is driven by the business unit and for others it's driven by the corporate development team. Some companies do it well and others are absolutely dismal at getting an idea pushed through the organization. Firms like Amazon and Google are very much in proactive deal mode. Proactive firms decide they want to be in an area, they survey the landscape and then decide whether they want to invest, partner or own, and what's actionable at what valuation.
Will we see any companies that have not made a big M&A splash in tech in the past do so this year?
If I had to pick one company, I would say watch for Twitter. It's a newly minted public company, they have become more active and I think they will follow a similar trajectory to Facebook on the M&A front.
Do you think we'll continue to see the "acqui-hiring" trend, like we saw with Yahoo's purchase of Tumblr and with it, rising star David Karp?
Three or four years ago there was a lot of capital available for company creation. These companies did a decent job of building products, but they haven't all built long-term stand-alone businesses. What they do have though is good products and product teams and they can be better served inside a company than as stand-alone businesses. You will see the acqui-hire scenario continue as companies look to add technical talent on a cost-effective basis.