According to 451 Research, the leading acquirers will spend hundreds of billions of dollars to buy innovative technology companies in the coming year. They're reacting to the rapidly changing marketplace, where information security and the Internet of Things (IoT) are the focus for major new investments.
Two key trends will drive much of the action in software M&A activity -- the movement of business applications and IT infrastructure to hybrid cloud-based service models, plus the need for new data management capabilities to address the growing demand on IT resources anticipated from IoT.
Furthermore, the digital transformation and big data analytics sectors will also drive M&A activities throughout the year. The pool of likely candidates to either be acquired or have a public stock offering is significant. As an example, their forecast for the software market identified more than 90 companies as potential M&A targets in 2016, and another 13 private companies as potential IPOs.
Technology M&A Trends for 2016
Because API management platforms represent some of the core enabling technology needed for IoT platforms and hybrid IT integration, 451 Research expects 2016 to bring increased acquisition activity around API management vendors, which was an active area for M&A in 2015.
In addition, communication service providers looking to bring IoT platforms to the market, and the technology vendors that serve those telecom service providers, are also strong potential acquirers.
Another M&A trend the market saw in 2015 is the rising importance of information security. According to an annual survey of technology investment bankers, for the first time in five years, mobility was displaced by enterprise security as the number one area of expected M&A spending increases in the coming year.
Two out of 10 investment bankers expect "substantially more" and another 52 percent anticipate "somewhat more" acquisition spending this year in the IT security market. 451 Research tracked 133 deals in the information security sector totaling $10 billion in 2015.
Though overall security revenue continues to increase among vendors in this sector, oversupply is a real concern. There's already some evidence that growth is slowing for incumbents. According to the 451 Research assessment, the market will be most active in data security, identity and access management.
The Anticipated Tech Market Correction
IoT will rise in prominence on M&A agendas in 2016, as key industry players consolidate in order to expand their portfolios to fill roles in the IoT value-chain. They'll either increase the breadth and depth of IoT adjacent services, and/or position themselves as end-to-end service providers.
"Though there will be billions in investment in these hotspot technology sectors, the deal-making environment in 2016 has changed dramatically and the market will see a much slower growth environment, with a lower volume of transactions and a dramatic drop in valuations," said Brenon Daly, research director at 451 Research.
Nearly two-thirds of senior executive respondents in the 451 Research 2015 survey of investment bankers indicated they see deal pricing coming down in 2016, compared with just 14 percent that anticipated valuations ticking higher.
That's almost a direct reversal of the typical valuation outlook over the past half-decade given by M&A advisers. Corporate buyers are even more bearish than their advisers, at least when it comes to their mainstay transactions.
Moreover, 74 percent of corporate development executives forecast that the M&A valuation of private companies would tick lower in 2016 compared with 2015. A trend of lower valuations in 2016, if they take place, could mean significant bargains ahead for the technology sector buyers.