M&A prospects better for small companies, new media

Two reports released this week shed some light on just what types of technology sector merger and acquisition deals are expected to show resiliency in 2009. Among the winners: small companies and nontraditional media companies.

Technology M&A deals fell 17 percent to 3,751 transactions in 2008 over the previous year, according to a report released Friday by ICON Corporate Finance. But small technology deals of under $100 million fared better, posting only a 15 percent decline.

These smaller deals, which account for 95 percent of all IT mergers and acquisitions, are expected to show more resiliency in weathering the tough economic storm, given they tend to be funded through the buyer's cash flow, rather than the tight credit markets, according to the reports.

Larger IT deals upward of $1 billion posted a 36 percent drop last year over the previous period, while acquisitions in excess of $1 billion posted a substantial 51 percent drop.

And while the economy is anticipated to have even greater challenges in the first half of this year, ICON noted it remains guardedly optimistic that tech M&A will not wither away.

With the sector remaining fragmented, buyers with cash on hand may look to M&A to consolidate and improve their efficiencies, the report noted. And it reiterated that the vast majority of deals are under $100 million and done with the buyer's existing cash flow.

Industry sectors that have retained their allure as buyout targets include mobile software, financial software, VoIP, storage and networking, security, online payments, virtualization, green tech, and online advertising companies, according to the report.

The traditional media world, meanwhile, is undergoing a transformation when it comes to M&A deals, according to a report released earlier this week by the Jordan, Edmiston Group (JEGI).

According to the report, media mergers and acquisitions are shifting away from buyers snapping up traditional media companies to ones that involve growth markets, such as database information, business-to-business online media, consumer online media, and interactive marketing services.

According to the JEGI report:

This transformational shift and retooling of the media industry from traditional businesses to digital and data-driven revenue streams, which began in earnest in 2007, is ongoing and continues to gain force. As a result, the number of M&A transactions was close in 2008 to 2007, but the "center of gravity" has shifted from larger traditional media deals to midsize digital and data deals.

For example, M&A deals involving media, information, marketing services and related technologies fell 13.1 percent to 758 deals last year over the previous year, while the value of those deals plunged 68.1 percent to $33.3 billion.

Deals involving database information services, however, shot up 77 percent to 46 deals last year, compared to the previous period. Some of those deals included the $96 million acquisition of JupiterImages by Getty Images.

The marketing and interactive services sector was down a slight 1.5 percent to 258 deals last year, over the previous year. JEGI expects, however, some interesting M&A deals to arise this year, as the pullback in advertising takes its toll on media companies.