The merger market for technology firms slowed down in 2019 as buyers, heeding Warren Buffett's warnings about high stock prices raising risks, backed off from many deals. Berkshire Hathaway chairman and CEO Warren Buffett is sitting on roughly $130 billion in cash specifically because he said the current stock market and bidding on acquisition targets has made deals too expensive.
Data from Union Square Advisors match up with the findings of CNBC's Q4 Technology Executive Survey of 51 high-ranking technology executives, in which 46% of respondents said their own organizations had passed on a merger within the past year because the price was too high. Another 19% said that had happened at least once in the past five years.
The CNBC Technology Executive Council survey released Tuesday was conducted from Dec. 2–11, 2019. It included a limited sampling of 51 of the 157 members of the council, who serve in senior technology positions at large companies, as well as at government and nonprofit organizations.
However, the same pessimism doesn't appear to be driving the outlook for 2020. Only 10% of CNBC's panel said their organizations would slow the pace of their merger-and-acquisition work, while 44% said it would be about the same and 26% said they expected their own companies to make more technology-driven acquisitions next year.
"By almost any measure, the market is expensive, at least within tech," said Ted Smith, co-founder and partner at Union Square, a boutique merger advisor based in San Francisco and New York. "It's not surprising that people said things are down a bit. It's going to restrict deal flow."
Through November, global technology merger volume was down 26% this year, from 2018 to $372 billion, according to Union Square's data, with the biggest declines coming in the largest deals. In particular, the slowdown may have been related to the very high stock multiples attached to companies working in cloud-based computing, and applications software meant to be used in cloud-based systems, said Smith and Wayne Kawarabayashi, another Union Square partner.
"No one wants to be the [buyer] that jumps the shark," Kawarabayashi said. "But on the flip side, there is so much capital out there."
The largest deals that did get done were in financial technology, where existing titans snapped up rivals in an effort to build scale. The biggest was the $35 billion deal between FIS and Worldpay, followed by the $27 billion deal by the London Stock Exchange to buy financial data analytics provider Refinitiv in July. Global Payments, which processes payments for 3.5 million mostly small businesses, bought rival TSYS for $21 billion, and Fiserv and First Data merged in a $22 billion deal. The four payments transactions accounted for almost 30% of global tech deal volume.
Low interest rates are offsetting the high deal prices for many buyers and making private equity firms more competitive with strategic buyers, Smith and Kawarabayashi said. The cheap money is letting private equity, which doesn't have to worry about diluting the price of an already public stock that has a lower price-to-earnings multiple than merger targets often command, offset the disadvantage of not being able to cut staff and functions at the target company that duplicate what the acquirer already has, they added.
More private equity firms, and private-equity-backed tech companies, could begin building empires by acquiring other tech companies, in the style of Dell's big $67 billion acquisition of storage giant EMC, they said. They also expect to see more activity in hot areas like cloud computing, including deals where private equity firms may take software companies private and let them manage a transition to cloud-based products outside the scrutiny of public markets.
One thing that could favor this trend, they say, are lower deal prices driven by moderating growth in corporate earnings by potential acquirers. A tighter economy, if it develops, could translate into more small companies looking to be acquired at once, letting a buyer's market develop, Union Square said in a report.
One potential buyer who's preparing for that is Param Kahlon, chief product officer at UiPath, a closely-held robotic process-automation company in New York that was valued at $7 billion in its latest venture capital financing round in April. It acquired Ukraine-based StepShot, whose products help users write instruction manuals for using complex software, in August.
"With many macroeconomists predicting a recession at some point in the next couple of years, valuation expectations may actually become more buyer-friendly in 2020," said Kahlon, one of the respondents in CNBC's survey, in a follow-up interview by email. "There has already been somewhat of a pivot from backing companies with high growth and no profits to more of an interest in companies exhibiting sustainable growth with a thought-out plan to near-term profitability."
Kahlon said UiPath doesn't plan to make changes in its own acquisition strategy and downplayed the idea that high prices are damaging the merger market.
"There have been and always will be sellers that are looking for more money than we feel the asset is worth, and we don't expect that dynamic to change," he said. "It's just part of the process."
At the top of the M&A pyramid, very large deals could run into more political scrutiny, but experts think that effect will be limited to high-profile potential buyers like Facebook, Smith and Kawarabayashi said. They added that for now, high prices mean that buyers are being cautious, and deals are taking longer as buyers impose tougher due-diligence reviews to make sure they are getting their money's worth.
"It's a major contributor to the fact that deals are taking longer to get done," Smith said.