Technology acquisitions fall

After 12 quarters of continuous increases in the number of European technology acquisitions, Q1 2006 saw the first reversal of the trend. The number of transactions in Q1 was 790, down 5% on the 828 deals in Q4 2005, but well up on the 679 acquisitions one year ago in Q1 2005. However, although the number of transactions is down, the combined value of all deals was substantially higher at $150.7bn compared to Q4 2005 ($93.1bn) and Q1 2005 ($54.0bn.)

The UK maintained its position as the country where most buyers are based. It is followed by Scandinavia, then France, Germany and Benelux, which all showed good gains over the past year. US and Canadian buyers slowed slightly accounting for about 11% of all deals, down on the all time high of 15%. Eastern and Central European companies were the most active buyers in the telecom sector.

Private equity investors have been major players in the sector by funding buyouts or by taking direct stakes in the company concerned. Private equity firms have accounted for over 15% of all acquisitions in Q1.

By sector, the content and electronic media sector has maintained its strong growth with 205 transactions in Q1 compared to 153 in Q1 2005 and just 90 in the equivalent period in 2004. IT services maintains its position as the most active sector with 217 transactions in Q1, a growth of 19% over the same period last year. Within IT services the strongest growth in deal flow was in outsourcing, consulting and resourcing activities. The software product sector, which has been tipped by many as the focus of consolidation, saw overall annual growth of 20%. Application software continues to be most active part of the market with the long-awaited consolidation becoming apparent among the enterprise software vendors.

The divestment by larger companies wishing to shed unwanted or under-performing divisions represents 28% of all transactions, a figure that has diminished substantially since the peak of 51% in the early part of 2003.

In terms of valuations, the median valuations of all technology company acquisitions have held reasonably steady over recent quarters despite a drop starting in the Q3 2004 from which the price to earnings (PE) ratio has since moved to 16.3. This has come about because of recent increases in corporate profits. The same effect has been seen on the public markets where the stock prices have increased but the PE values have declined. The price to sales (PS) ratio increased substantially in the past year and finished the last quarter at 1.47.