Cloud and SaaS market was fastest-growing sector of tech M&A activity

While technology M&As in 2012 declined in value and plateaued in volume, the number of deals in cloud and SaaS market tripled over the previous year.

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The global landscape for mergers and acquisitions among tech companies was particularly dreary last year, declining in value and plateauing in volume. But the market has a beacon of hope: cloud computing and Software as a Service, sectors that experienced the fastest growth in terms of volume in 2012, tripling in the number of deals over the previous year, according to a recent report.

Merger and acquisition (M&A) activty in the cloud and Software as a Service (SaaS) market accounted for 450 to 500 deals, or 15%, of the total number of technology mergers and acquisitions announced in 2012, according to London-based accounting and professional services firm Ernst & Young, which recently released its Global technology M&A update: October-December 2012 and year in review report. As of the fourth quarter of 2011, the market also enjoyed five consecutive quarters of big-ticket mergers and acquisitions.     

Biggest global tech deals of 2012

5. ASML Holding NV to acquire Cymer -- $2.5 billion (pending)

4. Dell acquired Quest Software -- $2.6 billion

3. CGI Group acquired Logica -- $2.7 billion

2. SAP AG acquired Ariba -- $4.5 billion

1. Cisco Systems acquired NDS Group Ltd. -- $5 billion

"You started to see roughly $1 billion-plus SaaS and cloud deals every quarter," said Joe Steger, technology industry leader for the transaction advisory services practice at Ernst & Young. "It really shows how disruptive the cloud and SaaS could be."

In February, Oracle shelled out $1.9 billion for SaaS provider Taleo, which specializes in talent management software for human resources professionals. SAP AG inked the biggest cloud deal of the year in May with its $4.5 billion acquisition of Ariba, a cloud-based procurement software provider. At the end of the third quarter in August IBM followed Oracle's footsteps by scooping up Kenexa, a SaaS provider specializing in recruiting and talent management software, for $1.3 billion. Oracle made another grab in December, this time for marketing automation SaaS provider Eloqua for $956 million.

The price tags on these deals are somewhat unusual given how young the cloud market still is, Steger acknowledged.

"If you think about Software as a Service and the cloud, those are very new sectors, so there aren't very many large players out there that could command billion-dollar-plus deals," Steger said.

As with any new trend in the technology market, consolidation is expected to continue, he added. Cisco Systems announced March 25 its plans to acquire SolveDirect -- a Vienna-based vendor and service provider specializing in cloud-based IT service management software -- for an undisclosed amount. Also in March, Google acquired Talaria, a Web application server startup, for an undisclosed amount to bolster its cloud platform strategy. SaaS giant Salesforce.com in February quietly acquired EntropySoft, a French startup that offers content integration software; Salesforce also announced in March it was raising money for future acquisitions.

"It's kind of hard to believe that Salesforce and Google are now the 'traditional' [cloud companies] looking to acquire these technologies," he said. "So, it might not be a traditional definition of consolidation, but more established players need to get these technologies of the future."

Technology market sees more smaller, strategic deals

Despite all the activity around cloud deals, the aggregate value of all deals in the overall technology market took a 35% hit from 2011 to 2012, dropping from $175.7 million to $114.1 million, according to the report. Deals worth at least $1 billion also made up less of the pie in the last year, accounting for 45% of the aggregate deal value in 2012, compared to 63% in 2011.

There aren't very many large players out there that could command billion-dollar-plus deals.

Joe Steger

Ernst & Young

As with the rest of the market, the technology sector was too rattled by ongoing macroeconomic uncertainty to feel confident enough to go for the bigger deals, Steger said. Instead, companies pursued smaller, more strategic acquisitions.

"We had the Eurozone crisis throughout the year, presidential elections, the fiscal cliff and all the commentary about the slow economic growth throughout the political campaigns," he said. "It really kept buyers from entering into those very large, transformative deals."

It's still too early to say how much may be turned around in 2013. Ernst and Young released a capital confidence barometer study in October, reporting that 45% of the 150 technology executives they surveyed said that buyers were lowballing their offers or sellers were overestimating their worth. 

"What they said back then was that part of the reason deals weren't getting done was [because there was] a valuation gap," Steger said. "And we still have that valuation disconnect between buyers and sellers."  

Let us know what you think about the story; email: Jessica Scarpati, site editor and follow @jscarpati on Twitter.

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