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Nagging Concerns Over U.S. Economic Growth Temper Tech M&A Market

-- 7 of 10 respondents to Morrison Foerster/451 Research M&A Leaders' Survey cite U.S. economic uncertainty as primary reason for sluggish M&A spending

NEW YORK and SAN FRANCISCO, Oct. 31, 2012 /PRNewswire/ -- A more subdued picture emerges from the latest survey of technology dealmakers conducted by global law firm Morrison & Foerster and syndicated technology research and advisory firm 451 Research. The percentage of technology insiders reporting an increase in M&A activity during the previous six months fell sharply compared to our inaugural survey in April.

Prospects for Dealmaking

Newly released data from the M&A Leaders Survey shows that the number of tech industry executives reporting a recent jump in deal-making – 39% – was nearly identical to those experiencing a decline – 37%. That's a significant narrowing of the gap from April's survey, when more than twice as many respondents reported an uptick in M&A activity (51%) compared with those who were seeing a decline (23%).

Notably, most dealmakers cite uncertain prospects for the U.S. economy as the prime cause of their reluctance to execute transactions. More than 70% of the 300 respondents participating said doubts about the sustainability of economic growth in the U.S. have been a significant drag on M&A activity in 2012. Macroeconomic worries eclipsed even high target company valuations as dealmakers' top concern, reversing the order of "deal hindrances" from the previous survey. Other key deal roadblocks cited include the upcoming presidential election, the persistent European debt crisis, and anxiety over the so-called "fiscal cliff" facing the U.S. in January.

Yet despite the increased pessimism, there are clearly pockets of positive sentiment among technology's dealmaking community. For example, the 49% of respondents who say they expect acquisition activity to increase in the next six months is nearly three times the 17% who anticipate a drop-off in deals.

The MoFo – 451 M&A Leaders Survey

The M&A Leaders Survey, conducted semi-annually by MoFo and 451 Research, is designed to take the pulse of tech industry insiders on the dealmaking market. Over half of the 300 respondents reporting are in-house executives - 19% of whom hold C-level positions, with 8% representing the general counsel's office, and the rest corporate and business development managers. One third are professionals at investment banks and financial advisory firms.

Respondents hail from all corners of the tech world. The majority of corporate respondents work in information technology businesses, including infrastructure and applications software, IT services, semiconductors, systems/hardware, telecom, Internet content and e-commerce, and hosting and managed services. Other segments represented include life sciences/biotech, and cleantech. Twenty-nine percent of those surveyed are based in and around Silicon Valley.

In addition to reporting on M&A spending trends and market concerns, respondents addressed questions relating to deal valuation and merger terms, as well as exclusivity agreements. The survey also delves into several "inside baseball" topics of special interest to dealmakers, including post-closing indemnity claims and provisions for holdbacks and escrow payments.

Highlights from the Survey

Here are some detailed highlights from the latest M&A Leaders Survey from Morrison & Foerster and 451 Research:

1.     Recent Deal Flow: Going Both Ways – As noted above, dealmakers are split on the recent state of the market: 39% report an increased level of M&A activity over the past six months at the companies they work for or advise, while 37% report less activity. Meanwhile, 24% describe their deal flow as being consistent with the same period in prior years. These equal swings in perception could well reflect real-life ebb-and-flow distinctions between certain subsectors of the overall technology space, with cloud and mobile apps on the upswing, and social media and semiconductors cooling off.

2.     Tempered Optimism – The current survey respondents are still leaning toward bullishness on near-term prospects, just not as much so as those surveyed this past spring. The 49% who say they expect acquisition activity to increase between now and the end of the first quarter of 2013 is nearly three times the 17% who anticipate a drop-off in deals. But these figures are notably less bullish than last April's findings, when 59% projected activity in the coming six months would increase and only 8% anticipated a decline. In both surveys, a solid one-third hold to the middle ground that M&A activity in the six months to come will be unchanged – though the baseline for that potential change seems to have contracted.

3.     Macro Reality Check – Statistically, 2012 has been an off year on the deal front. 451 Research notes that through the first three quarters, aggregate global spending on technology M&A stood at around $116 billion, down 36% from the same period a year ago and representing a 22% drop from 2010. Global deal spending for 2012 is on track to come in at the lowest level since the recession-plagued year of 2009, breaking a two-year streak of rising expenditures. The M&A Leaders Survey probes what factors may have contributed most to the decline and found that the greatest number of respondents – 7 out of 10 – blame ongoing doubts about U.S. economic growth. That was followed by uncertainty over the European debt crisis (58% labeling it a strong factor), lack of clarity over the likelihood of tax hikes and spending cuts in 2013 (53%), and uncertainty about the outcome of the November 6 presidential election (46%).

4.     High Prices and Other Hindrances – Respondents also ranked specific market factors that have been holding their dealmaking in check. Top of the list is the concern that price expectations of target companies are too high – 66% of respondents single out prices as a strong deal inhibitor, with several noting this year's run-up in stock indexes. Other top perceived deal hindrances are: a lack of qualified targets; due diligence issues; depressed stock price of the acquiring company; and an inability to obtain financing.

5.     Valuations: More or Less? – Possibly tempering enthusiasm among many who believe the M&A market will pick up, respondents are of noticeably mixed opinions on private company valuations: 47% believe that acquisition pricing for private companies will remain unchanged over the next six months, while 28% expect a rise in private company valuations and only 25% call for an increase in deal values. That's a sharp reversal from last April's survey, when 43% predicted higher private company valuations and only 10% forecast a drop.

Robert Townsend, co-chair of Morrison & Foerster's Global M&A Practice, says the somewhat scattered sentiment is not unexpected. "The results illustrate some strong differences of opinion on the vibrancy of the deal market, and it's easy to come away thinking that many tech insiders have turned more cautious, especially in light of the pronounced turnabout in projected valuations from our last survey. It's worth noting, however, that in dealmaking – as in baseball – it sometimes takes just one or two wins to restore momentum. Given the large cash positions held by many major tech companies, along with continued rock-bottom interest rates and opportunities for companies to make some bold strategic moves, we understand the view held by many of those surveyed who expect to see a burst of deals heading into the first quarter of 2013."

Indeed, Mr. Townsend has seen that movement first hand. His M&A team at Morrison & Foerster is acting as lead counsel to SoftBank in its recently announced $20.1 billion investment in Sprint Nextel – with a  reported enterprise value of around $43 billion, it is one of the biggest announced U.S. deals of the year. It is the largest overseas acquisition ever by a Japanese company, and the largest U.S. investment ever from Asia.

Brenon Daly, research director for M&A at 451 Research in San Francisco, noted that respondents did agree on one thing: the factors tamping down transactions in 2012. "Although the recession officially has been over for a couple years, the cloudy outlook for economic growth continues to have many dealmakers sitting on the sidelines, especially since so many of them feel that potential acquisition targets remain overpriced," he says. "In taking a closer look at the numbers, we see six times as many respondents saying the precariousness of the US economy is crimping deal-flow compared with those that saw no impact. When executives and their advisors are more concerned with the economic outlook than the valuation of target companies, you can appreciate why caution is the watchword for M&A right now."

Other survey findings of particular interest to dealmakers:

6.     Term Sheets of Endearment – Respondents place considerable importance on term sheets in getting a deal done; most agree they are critical and that the bulk of major business issues are won or lost during term-sheet negotiations. However, nearly 44% concur that the parties frequently deviate from their original terms in getting to a definitive agreement. Respondents also overwhelmingly agree that term sheets should avoid binding clauses – aside from exclusivity or confidentiality (77%) – and that a good term sheet should address the time schedule for the transaction (82%).

7.     Use of No-Shop Agreements – Tech executives and other respondents assessed the value of exclusivity agreements—so-called no-shop provisions giving buyers a fixed period of time to negotiate a friendly deal without fear the target will pursue alternative offers. While the majority of respondents – 60% – agree that bidders would be foolish to expend significant time and money on a transaction without having a no-shop agreement in place, more than a quarter of those surveyed fear that they are "frequently breached by targets, but there is no practical way to enforce them." Not surprisingly, 60% feel that no-shops tilt the playing field in favor of the bidder. But targets hold their own trump card. Nearly 82% of respondents support the position that a target company shouldn't consent to a no-shop "until the bidder has committed to a price and positions on most of the material terms of the deal."

8.     Accounting for Indemnity Claims – Even the best due diligence can't always detect the risks when two companies combine – environmental, regulatory, shareholder, financial and other problems often have a way of rearing their heads. MoFo and 451 Research were interested in learning to what degree tech buyers obtained post-closing assurances over the past two years – either through escrow arrangements or by holding back a portion of the acquisition price – against post-closing liabilities. More than a third of respondents – 35% – say that post-closing indemnity provisions typically represent 11-15% of the total deal value. A slight majority (53%) saw the average as less than 11% – with 18% seeing 5% or less held back or placed in escrow – while 12% saw the average as exceeding 16%. Respondents also noted that public target transactions generally do not have escrows.

9.     When Claims Go "Beyond the Escrow" – The good news for target companies is that indemnity claims are a relatively rare event. More than 73% of respondents say that buyers brought claims on only 10% or less of their M&A transactions in the past two years, including 40% who said that buyers in their transactions made no indemnity claims in that time. A handful of respondents – 5.3% – saw claims on more than half their deals. Respondents reported only a smattering of instances in which claims seeking to go "beyond the escrow" or holdback were made or threatened against former shareholders of the target company.

The next M&A Leaders Survey will be conducted and announced in the spring of 2013.

About Morrison & Foerster: Morrison & Foerster ( is one of the world's premiere advisors on mergers and acquisitions, with a strong expertise in technology-related deals. The firm's global corporate group has played a lead role in many of the largest technology M&A transactions of the past two years. Recent advisory assignments included:

  • SoftBank in its announced $20.1 billion investment for a 70% interest in Sprint-Nextel (announced Oct. 2012)
  • SoftBank in its $2.3 billion acquisition of wireless carrier eAccess (announced Oct. 2012)
  • Hitachi in the $4.8 billion sale of its hard disk drive and data storage business, Hitachi Global Storage Technologies, to Western Digital (closed Mar. 2012)
  • Intel in its $7.7 billion acquisition of McAfee (closed Feb. 2011)
  • Intel in its $4.1 billion investment in Dutch chip-maker ASML (announced July 2012)
  • Intel in its $1.4 billion acquisition of the Wireless Solutions Business of Infineon Technologies AG (closed Jan. 2011)
  • DaVita Inc. in its $4.42 billion proposed acquisition of HealthCare Partners Holdings (announced May 2012)
  • Novellus Systems, Inc. in its $3.3 billion sale to Lam Research Corp, the largest announced stock-for-stock tech deal in 2011
  • Terumo Corporation, in its $2.6 billion acquisition of CaridianBCT (closed April 2011)
  • Tokyo-based DRAM chip-maker Elpida in its proposed $2.5 billion acquisition by Micron Technologies, one of Japan's largest inbound M&A deals ever
  • Toshiba Corporation in its $2.3 billion acquisition of Landis+Gyr AG (closed July 2011)
  • The special committee of 99 Cents Only Stores in a $1.6 billion "going private" transaction (closed Oct. 2011)
  • Toshiba Tec, in its acquisition of IBM's Retail Store Solutions business for approximately $850 million (announced April 2012)

About 451 Research: 451 Research (, a division of The 451 Group, is focused on the business of enterprise IT innovation. The company's analysts provide insight into the competitive dynamics of emerging technology segments, with a deep focus on mergers and acquisitions. Business value is delivered via daily published research, periodic deeper-dive reports, data tools, market-sizing research, analyst advisory, and conferences and events.

The company's clients – including vendor, investor, service-provider and end-user organizations – rely on 451 Research to support both strategic and tactical decision-making. 451 Research is headquartered in New York, with offices in key technology and financial markets, including San Francisco, Washington DC, London, Boston, Seattle and Denver.


Allan Ripp 212-262-7477

Amy Merriweather 415-268-6063

SOURCE Morrison & Foerster LLP; 451 Research

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