Tech sector reports first M&A decline since 1992

The number of mergers and acquisitions in high tech in the first half of 2001 has plummeted by more than 55 per cent, according to a recent report.

The CATA Alliance, which represents Canadian high-tech companies and entrepreneurs, released the report on Wednesday. It found that the number of acquisitions in the Canadian software fell from 58 to 26 since the beginning of 2001.

That’s less than the total number of acquisitions reported during the same period in 1999, prompting analysts to question if the industry is facing a crisis, or if things are simply getting back to normal after an extraordinary 2000.

David Paterson, CATA Alliance executive director, said these numbers are as a result of a “tech stock market that has really gone into the tank.”

“If you look at the overall M&A statistics, whether they are in the IT sector, whether they are in Canada, the United States or globally, for that matter, there has been a sharp drop in the first six months of this year,” he said. “I would not regard it as a crisis and it certainly is not forever. But it is one of those phenomena that you see in every stock market cycle.”

What worries Paterson more than the number of deals is their value, which dropped from $6.1 billion last year to $1.2 billion.

CATA statistics show that the value of Canadian purchases of foreign companies also dropped 69 per cent. The situation would have been worse, Paterson said, but for Montreal-based outsourcer CGI’s $670 million acquisition of IMRglobal Corp, a Florida-based e-commerce and computer services company, earlier this year.

The value of Canadian companies acquired by others in the country was off by 80 per cent and foreign acquisitions dropped 89 per cent, CATA reported.

“The value just collapsed,” he said. “It is truly amazing. If you take that CGI deal out of the statistics, it’s even worse. It would make it look like activity almost ceased.”

Paterson said he has his fingers crossed when he predicts that there will be visible evidence of an improvement by year’s end. “In the high-tech industry, acquisitions have been the route to rapid growth as long as I have been following it, which goes back to 1987,” he said. “It is cyclical, but this has been an extremely long cycle. This is the first time that merger activity has declined since 1992.”

Paterson said the 1999 market — when the value was $3 billion — was a more realistic and sustainable level.

“It’s still off by half,” he said. “Last year was an aberration, but things are still off.”

Another analyst, however, thinks things are right on track.

“Reality has set back in,” said Gaylen Duncan, president and CEO of the Information Technology Association of Canada (ITAC). “We have been running 50s and 60s for three of the last four years. In the year 2000, we had 405. That’s the aberration. This is about the right number. Thirty would have been dead-on, so we are only four away.”

Duncan blames current problems on last year’s jump. “The era that caused problems in the industry was when things were over-inflated,” he said. “I think if anything now, we are back to business as usual. We are seeing more predictable numbers in terms of sales volumes, dollar volumes, profitability, than we have seen in the last six to nine months.”

Like Paterson, Duncan believes the end of the year will show an upswing for the industry.

“We just dropped our forecast from nine per cent growth for Canada to seven as a mid-year correction. That is still double plus the Canadian economy as a whole, so that is not unhealthy. It’s just not as healthy as it used to be.”

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