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PwC: Q2 technology M&A thrives

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PwC: Q2 technology M&A thrives

Software and internet deals thrive while hardware and semiconductor sectors drive increasing deal values.

Extending the positive momentum from the second half of 2013, equity markets set new highs, IPO markets reached activity levels not seen in years, VC investments harkened back to 2000 levels, and economic outlooks remained modestly optimistic across sectors, according to PwC's U.S. Q2 technology deals insights report, released today. Private equity continued to play an active role in technology, though challenged by strategic buyers who are able to leverage healthy valuations and substantial amounts of cash on hand.

In the second quarter of 2014, PwC found that the number of technology transactions rose, increasing 87% over the second quarter of last year. The second quarter ended with 62 transactions completed, mirroring that of the first quarter and continuing the momentum of 2013's second-half surge. With the 62 transactions totalling $26.7 billion, average deal value totalled $430 million, a slight increase from $406 million in the first quarter, and down from $510 million average over the last 12 months. A total of four transactions in excess of $1 billion closed.

"After a strong start during the first quarter of 2014, the second quarter followed suit with an increase in the number of technology deal announcements."

Transaction volume remained active with the software and Internet sectors leading the way in terms of deal volume, but the hardware and semiconductors sectors drove transaction value in the second quarter with some large deal closures. In comparison to the second quarter of 2013, one of the worst in recent years, transaction activity grew substantially with volume up 72 percent and value nearly doubling at 87 percent. There were four deals in excess of $1 billion during the second quarter, slightly down compared to an average of six per quarter over the last 12 months.

"After a strong start during the first quarter of 2014, the second quarter followed suit with an increase in the number of technology deal announcements. While the number of new billion-dollar deals announced remained in line with the first quarter, the volume of smaller and middle market transactions notably grew," said Rob Fisher, PwC's U.S. technology industry deals leader.  "This upward trend in IPO markets combined with the tremendous pent-up cash balances of the leading technology players bodes well in driving the momentum of technology M&A through the remainder of the year."

Technology IPOs accelerated pace, adding 22 new pricings with proceeds exceeding $5.1 billion. New publicly announced IPO registrations continued, totalling 20 for the quarter and a number of additional registrations filed confidentially under the rules of the U.S. JOBS Act.

While overall second quarter deal volume aligned with the first quarter, with volume relatively flat and value increasing 4 percent. The software sector continued to stay strong and saw an increase in the number of closed deals.

  • The software sector remains at the forefront of deal activity but has traditionally been comprised of smaller deals. At 20 transactions closed with an aggregate deal value of $4.1 billion, volume grew 18 percent while value declined 44 percent over the first quarter. Compared to the second quarter last year, deal volume increased 150% and value increased 163%.
  • Despite the recent trends in hybrid business models adjoining software and internet companies, second quarter internet deal activity reflected more transactions focused on traditional e-commerce deals with 15 transactions closed.
  • IT services volume remained flat with nine deals closed and values that grew 10 percent, resulting in an increase in average deal value from $278 million to $305 million.
  • With volume down 8 percent and value up 60 percent, the average deal value for the hardware sector increased to $866 million from $496 million in the first quarter with 11 closed transactions.
  • In the semiconductor sector, volume increased 40 percent, while average deal size quadrupled. While exhibiting some volatility between quarters, consolidation continues to remain the topic of conversation for semiconductor companies.

With the proliferation of Internet-connected and wearable devices, PwC sees the 'Internet of things' continuing to evolve, with these trends driving the demand for specialized semiconductor components and software to enhance them. Additionally, cloud, mobile and social are other focal areas driving new forms of innovation and are prime targets for technology players across various sectors.

"We anticipate that the upswing in broader IT spending will encourage top technology companies to start positioning themselves to capture future value by planning for inorganic growth.  We expect those actions to further boost the outlook for technology deals," added PwC's Fisher.

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