Life After Facebook
The much-criticized Facebook IPO last May dealt a blow to tech sector confidence and – in the context of bigger picture uncertainties such as the U.S. presidential election and global economic concerns – helped befuddle the broader IPO environment for the latter half of 2012. In the aftermath of such a high-profile disappointment, the prospect of more social media companies attempting to go public seems remote. However, trends evolving in the tech sector may make companies with social connotations or overtones more attractive targets for acquisition in 2013.
Baird’s investment banking team believes the continued rise of technology-enabled services and a large-scale shift to flash-based storage could both lend momentum to a coming wave of mergers and acquisitions as larger, established companies seek to accelerate growth or expand in new niches.
Services for Sale
Baird sees opportunities throughout the software sector, where companies that can show growth are in high demand not only for large strategic buyers boasting cash-rich balance sheets but also for private equity firms seeking opportunities to deploy capital. This trend is particularly pronounced among technology-enabled services.
This sub-sector represents a dynamic new business model driven by cheaper hardware, the rise of big data, and the development of ever-more-sophisticated analytics. Companies are using software and algorithms to introduce new efficiencies to traditional businesses like insurance adjusting, package delivery, or product merchandising. This has given rise to what Baird calls “tweener” companies, where 60% of the typical company’s focus is on its technology and 40% is dedicated to the services that technology enables.
For investment banks that want to shepherd deals involving these companies, success will be contingent on their ability to bring together multi-sector teams with deep knowledge of both the underlying technologies and the client industry targeted by the service (both being areas of particular strength at Baird).
Data Storage Shift
Another major trend is the changing face of data storage, with flash-based technologies assuming a bigger role driven by the growth of online and social media. The rise of video on social media sites has increased data storage demands drastically. And the resulting shift away from slower, conventional disk drive based hardware has already spurred a wave of M&A activity.
In storage, new technologies are typically pioneered by start-ups. And while some choose to go the IPO route (like Fusion-io), many are ultimately acquired by their bigger competitors. This time around, large, market leading companies like VMware, HP, Dell, and IBM are helping to drive consolidation. This dynamic is fueling enthusiasm for private equity firms whose drive to invest and build value in these smaller companies before they’re acquired should keep the sector active for the next several years.
The IPO Market is Anti-Social…For Now
Facebook’s IPO changed the aspirations of companies within the social media space. Many have already scrapped plans to go public and sold themselves to larger strategic buyers and private equity firms instead. In the latter half of 2012, Google, Oracle and Salesforce.com acquired Vitro, Wildfire Interactive and Buddy Media, respectively, with a total deal value of more than $1.5 billion.
While Baird expects the appetite for social IPOs will pick up again at some point, for the near-term companies appear to have collectively acknowledged strategic M&A as the better path to realizing liquidity.
Head of Technology Group
Co-Head Equity Capital Markets