The Past and Present of Tech M&A

2014 has been a record year for mergers and acquisitions (M&A).  We’ve seen the greatest volume on record since the financial crisis – with over $1 trillion dollars from over 7,000 proposed deals – and that number will grow even higher by the end of this year. 

Historically, the factors that drive M&A in the tech sector have not changed much, but the volume of deal making has grown as innovation spreads daily by a growing list visionary entrepreneurs. M&A remains the most rapid and potent means to an end, where ultimately the ‘bottom line’ serves as the great equalizer.
No sector has seen as much innovation or M&A as the telecom industry, which has gone through huge evolutionary skips, consolidation moves, regulatory shifts, globalization leaps and competitive jumps all the while underpinning the creation and dominance of the internet.
Indeed, a lot has happened over the years to get us to where we are now in respect to the kinds of technologies that are attracting buyers. Several key trends have really mattered and will shape the future.

From Hardware to Software
During the course of the past fifteen years, companies that fit under the Telco Infrastructure M&A umbrella have changed the way they see themselves.  Once focused on next-gen ‘products’ and enhancing ‘features’, the firms that are now ripe for the taking are the ones that are pushing managed services, productivity, flexibility, and customization with the lowest customer cost of ‘usage’ vs ‘ownership’.

Companies are introducing completely new and disruptive service offerings, which benefit from the cloud’s capabilities, and only a refined emphasis on new features. The days of merely adding a button to define and sell a new product are long gone.

The main evolutionary trend is defined as a slow, but steady path around the concept of “everything is code” or a software technology substitution of hardware. This is what Network Functions Virtualization and Software Defined Networking is all about – the idea that any hardware function (especially legacy core hardware, but never pure transport) can be converted into a flexible software program.

Many of the highest value deals are for companies that possess extreme flexibility in designing replacements, and an intentionally undetermined future product set. Five to ten years ago, this required a dedicated core platform with compatible servers – now it is just code.  The word ‘proprietary’ seems to be equivalent to ‘leprosy’.

There are two primary reasons driving the shift towards software code: the lower cost and overall speed to market advantages of software development versus hardware.  These factors, coupled with the tremendous global distribution and development of virtual workers/teams, and a physical shift in a human’s ability to handle change itself (“the user adoption rate”) has only enhanced the advantages.

Today’s products are able to be highly customized to specific customer requirements, and upgraded on the fly over an entire user group. Consumers are calling the shots, and innovators are appeasing them with bespoke solutions and greater personalization for services.

Global Convergence 
Before the expansion of the Internet, companies that created innovative technologies would be bought and deployed regionally. Thanks to the Internet, there’s now an instant awareness of technology innovations around the globe, creating a fast moving, competitive environment for M&A.
Innovation and technology are highly sought after, and this real-time awareness acts as a major incentive for M&A.  The closer to Silicon Valley, the more commoditized the M&A process is where it is viewed as a core growth strategy. In Asia, only recently has there been an initial cultural change where it is now considered acceptable to buy and sell a company, mimicking the North American and European M&A and investment strategies.  The greatest limiting factors in Asia’s M&A growth are entrepreneurial skills, language, and multi-cultural management capabilities.
The U.S. market still drives most Telco technology M&A with European deal making having declined to perhaps half of what it was fifteen years ago. Recent trends in European private companies landing senior executives in the U.S. or managing to secure US venture investment have increased.  This is primarily done to afford close proximity to larger customers and employees in the US market, but also with an eye on the potential exit to a U.S. buyer.
Future outlook
The M&A environment is extremely healthy at the moment – both from a buyer and seller perspective. In addition to this, technology innovation is growing rapidly across the globe.  We’re seeing the shift or innovation transition in the telco sector from the need for pure technology enablement to larger scale technology application development.  We finally have the baseline support for innovation in place. As a result, the next five to ten years will offer an exciting landscape for M&A focusing on what can be done from an application standpoint, which will run on the successful infrastructure innovations built out over the last 20 to 30 years.

Makes sense…companies that augment their R&D budget with tactical software focused M&A expansion grow faster than the market.

B. Holt Thrasher founded Mooreland Partners in 2002 and serves as Managing Partner. He brings more than 25 years of investment banking, operating management and consulting experience, where he has completed numerous domestic and cross-border transactions specializing in communications software and services. Holt advises companies in technology sectors such as, wireless and enterprise mobility software applications, location services, operating and business support systems, network infrastructure software and applications. Learn more at http://www.moorelandpartners.com.

B. Holt Thrasher

Holt founded Mooreland Partners in 2002 and serves as Managing Partner. Based in the Greenwich office, he brings more than 25 years of investment banking, operating management and consulting experience where he has completed numerous domestic and cross-border transactions specializing in communications software and services. He advises companies in technology sectors such as wireless and enterprise mobility software applications, location services, operating and business support systems, network infrastructure software and applications.