Tech mergers and acquisitions took a steep dive in the third quarter, falling by a third compared with the same period last year, as Wall Street investment banks and financial institutions were rocked to the core, according to a report released Wednesday by The 451 Group.
Tech deals fell to 691 transactions with a total value of US$37 billion in the third quarter, down from 822 deals and a value of US$58 billion a year ago. That marked the second consecutive year that third-quarter M&A activity declined.
According to Brenon Daly, a financial analyst with The 451 Group:
"There are a number of reasons for the muted deal flow, starting with the barren conditions in the credit market. That knocked the number of leveraged buyouts from 36 during the third quarter of last year to just 12 this year. And while the private equity firms have billions in equity capital, they have been holding onto it tightly--even as some tech companies across the board have seen their valuations cut 20--30 percent."
Private equity firms were not the only ones holding back. Technology titans known for their use of strategic acquisition also curtailed their activity during the third quarter, according to the report. Google, which has seen its share price take a tumble, signed off on four deals since the start of the year, compared with 14 transactions during the same period a year ago.
And IBM, meanwhile, has only acquired one company this year, compared with three companies within the same time period last year.
Buyers are also scaling back on the amount they're spending on a per deal basis. During the quarter, only six deals worth in excess of US$1 billion were announced in the September quarter, compared with 11 such deals in the previous year and 22 deals in the same period in 2006, according to the report.
Advisers to prospective buyers are currently shaken because of investment companies like Lehman Brothers and Merrill Lynch disappearing off Wall Street to financial institutions like Washington Mutual, the nation's largest thrift, having to find a buyer themselves.
Daly noted in his report:
"Besides the uncertainty concerning the advisers that help support the transactions, there's also doubt about the institutions themselves right now, which complicates deals. Consider the highly unusual step taken this week by JDA Software to shore up confidence in its ability to pull off its planned US$461 million acquisition of supply chain management vendor i2 Technologies. The company issued a press release confirming the commitment of its financial backers to finance the deal, as it added another bank to the syndicate. (The market began to bet against JDA's ability to finance the planned deal because Wachovia, an ailing bank that eventually got sold to Citigroup, was one of the two banks on the ticket to provide the debt. Wells Fargo has since been added)."
And as the fourth quarter begins, the outlook for the full year is one that is expected to post a drop in M&A spending--which would end four consecutive years of annual increases.
This article was first published as a blog on CNET News.com.
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