April 2016 | ey.com/ccb/technology | 14th edition

Technology

CapitalConfidenceBarometerTech dealmaking drive continues, and takes new shape, in 2016

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Key findingsTechnology

of executives expect economic stability or modest growth84%

52%

57%

40%

of tech execs see growing M&A, but this number is down sharply

see the valuation gap increasing between buyers and sellers

are planning alliances to create value from underutilized assets

2 | Capital Confidence Barometer

3 | Capital Confidence Barometer

Tech dealmaking drive continues, and takes new shape, in 2016

The global technology dealmaking landscape today is marked by the twin forces of digital disruption and a prolonged low-growth economy, according to EY’s 14th biannual Technology Capital Confidence Barometer. Disruption drove tech M&A to new heights in 2015, with 95% of the tech executives we surveyed projecting similar or even greater volumes of mergers and acquisitions this year. At the same time, low-growth prospects are adding impetus to new kinds of tech alliances, beyond classic M&A and joint ventures, especially with the emergence of the sharing economy and what EY terms “industrial mash-ups.”

Both of these digitally-enabled models reflect the need to do more with less to innovate and grow in sluggish times. In the sharing economy, that means realizing value from underutilized assets, as largely seen to date in the business-to-consumer (B2C) market. Industrial mash-ups further this model, as a new form of dynamic and increasingly automated partnering in the business-to-business (B2B) market.

The imperative for optimal results under tighter economic conditions is, in fact, a theme running through this edition of the Barometer, in which tech executives show increasing deal discernment. Previously high-positive perceptions of such M&A fundamentals as the number, quality and “closability” of acquisition opportunities have diminished. More potential buyers are walking away from deals, especially because of issues uncovered during due diligence. Many actual buyers have been disappointed with deals not meeting expectations or delivering the intended strategic value.

Tighter conditions are evidenced by lower levels of confidence among tech executives in corporate earnings, equity valuations, short-term market stability and credit availability. These factors have the potential to crimp resources for M&A.

But corporate growth is not optional, particularly with shareholder activism rising on boardroom agendas. EY’s Global M&A technology report for 1Q16 underscores the drive to continue dealmaking, with tech M&A volume rising 2% year-over-year (YOY) in the first quarter of 2016. And according to this report, deal pipelines remain robust.

At the same time, 40% of tech companies surveyed are planning to enter alliances with other companies to help create value from underutilized assets. Industrial mash-ups — intentionally forming, living and dying very dynamically, as determined by business need — present the added value of avoiding the kind of post-merger executional disappointment this report highlights.

Going forward, dealmaking will certainly continue to reshape the technology industry, but many deals are themselves being reshaped, to pursue growth more dynamically via alliances (mash-ups), as well as structurally (M&A).

Jeff LiuGlobal Technology Industry LeaderTransaction Advisory Services EY

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4 | Capital Confi dence Barometer

Macroeconomic environmentTech companies accept reality of prolonged low-growth economy

Many tech execs temper their economic optimism

Having accepted that global economic growth is unlikely to accelerate in the near term, companies have been revising their strategies to enhance their revenues and protect their earnings. While 84% of tech executives see a stable or modestly improving economy, there has been a 38-point drop (to 1%) in those projecting strong improvement only six months ago. Economic and political instability, including the impact of the strong US dollar and weak oil prices, have tempered optimism.

Tech sector confi dence has also receded in corporate earnings and capital markets. Fifty-seven percent of tech executives see corporate earnings as stable, but far fewer now have the positive growth outlook of six months ago (38%, down from 75%). The survey recorded similar drops in confi dence in equity valuations (42% are now positive, vs. 56% in October 2015), the short-term market (47% vs. 74%) and credit availability (47% vs. 78%).

of tech companies expect economic stabilityor modest growth

see commodity and currency volatility as the greatest economic risk

project stable corporate earnings

84%

26%

57%

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Capital Confi dence Barometer | 5

Corporate strategyTech companies trend toward alliances

Industrial mash-ups emerge in cost conscious times

Cost reduction and regulatory oversight tie for the top boardroom concern in this Barometer (at 41%), given low economic growth and recent antitrust scrutiny of proposed megamergers. Both concerns also support a growing trend toward alliances, as companies look for less costly corporate growth strategies with fewer structural complications than M&A. The tech sector is seeing more sharing economy business models and what EY calls “industrial mash-ups,” a new form of dynamic and increasingly automated alliance-building that brings sharing economy benefi ts to the business-to-business (B2B) market (see EY report: Industrial mash-ups: a disruptive new partnering form will accelerate innovation — again).

Cost concerns have also reduced hiring intentions in the tech sector, from 56% in October 2015 to 23% today. Even so, attracting and retaining talent was identifi ed as the second-highest priority for driving growth (44%). The top tech sector priority was making better use of digital technology and analytics (53%). Notably, this same priority topped the list across all sectors (47%).

of tech executives see cost reduction, regulatory oversight rising on boardroom agendas

are planning alliances to create value from underutilized assets

plan to keep current workforce size

41%

40%

61%

42%

62%

36%

75%

47%

42%

54%80%

68%

% of positive attitude deal metrics

Increase

Remain at current levels

Decrease

57%51%22%

36%

7% 2%

47%76%

Apr–16Oct–15Apr–15

Apr–16 Oct–15 Apr–15

6 | Capital Confi dence Barometer

M&A outlookDeal fundamentals are mixed

Valuation gap perceived as small, but growing

Over half of tech executives (55%) see the gap in valuations between buyer and seller as 0%-10%, which could ease M&A negotiations — for now. In the coming year, however, more than half see the gap growing. At the same time, nearly one-third (31%) see asset prices declining.

57% of tech executives see the valuation gap increasing in the near term.

A spike six months ago in positiveperception of deal fundamentals has subsided.

42%

62%

36%

75%

47%

42%

54%80%

68%

% of positive attitude deal metrics

Increase

Remain at current levels

Decrease

57%51%22%

36%

7% 2%

47%76%

Apr–16Oct–15Apr–15

Apr–16 Oct–15 Apr–15

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Capital Confidence Barometer | 7

Tech M&A expectations ease but no sign of downturn

Record 2015 tech M&A extends into 2016

Even after record-setting levels in 2015, tech M&A volume rose 2% YOY in the first quarter of 2016 to 1,002 deals, according to EY’s Global technology 1Q16 M&A report. Quarterly value fell 14% YOY, but still ranked among the top 10 highest-value quarters ever. This Barometer shows that 43% of tech executives expect dealmaking to continue at a stable level this year, while 52% see it growing. In our last Barometer, fully 80% were projecting growth.

Tech companies plan larger deals today; where only 1% planned US$1 billion-plus deals one year ago, 10% now express such intentions. A similar rise is found regarding middle-market deals of US$251 million to US$1 billion (37% now vs. 16% one year ago). Fewer are looking at deals any smaller (53% now vs. 83% a year ago). More have multiple deals in their pipeline now than a year ago (84% now vs. 47% a year ago).

M&A outlook

of tech execs see growing M&A, but this number is down sharply

expect dealmaking to stabilize

are driven by changes in customer behavior to pursue cross-sector deals

have two or more deals in their pipeline

52%

43%

28%

84%

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8 | Capital Confidence Barometer

M&A outlook

Tech dealmakers increase scrutiny

Many prepared to walk away from deals

More potential buyers are walking away from deals (84% in this Barometer, vs. 71% in the last), especially because of issues uncovered during due diligence (27%). Many actual buyers have been disappointed with deals not delivering the intended synergies (20%) or strategic value (15%). Competition from other buyers appears to be waning: 18% of execs surveyed for this Barometer said competition has made them scuttle a deal, vs. 37% in the last Barometer.

Downward pressure on earnings could be the culprit, as 44% of tech executives project more distressed asset sales. Among other deal trends expected to gain in prominence: greater competition from private equity acquirers (24%), hostile bids (21%) and outbound acquisitions from China (11%).

of tech execs are prepared to walk away from deals that don’t meet their scrutiny

have walked away because of issues uncovered during due diligence

of buyers say their deal didn’t deliver intended synergies

expect there will be more distressed asset sales

84%

27%

20%

44%

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Capital Confidence Barometer | 9

M&A outlook

Top five investment destinations for sector

Tech execs see cross-border opportunities, risks

Dealmakers attracted to top-tier developed and emerging markets

Uneven global economic growth is driving companies to look for deals across the board, with 73% likely to pursue a cross-border acquisition within the next 12 months. At the same time, cross-border tax issues pose increasing risk, due to the ongoing implementation of the multilateral tax guidelines produced last year by the Organisation for Economic Co-operation and Development’s base erosion and profit shifting project (OECD BEPS). With uncertainty surrounding this sweeping set of tax changes, 37% of tech execs are considering the implications for M&A, although they have not changed their planned acquisition strategy.

Stronger growth in the US and UK and the attractiveness of high-quality assets in Germany are making these countries popular destinations for investment. China (mainland) and India also remain attractive destinations for investors, notwithstanding recent concerns about the wider Asia-Pacific region’s economic growth and stability.

of tech execs have considered the OECD BEPS implications for their M&A, but not changed plans

have not even considered the implications of the OECD BEPS guidelines for M&A

have canceled a planned acquisition due to the new tax environment

37%

41%

7%

1 2 3 4 5

IndiaUnited Kingdom

United States

China Germany

10 | Capital Confidence Barometer

ContactsContactsFor a conversation about your capital strategy, please contact us:

Ranjan Biswas India +91 806 727 5131 ranjan.biswas@in.ey.com

Tim Dutterer Co-Leader Technology, Parthenon-EY +1 415 264 8442 tim.dutterer@parthenon.ey.com

Staffan Ekström Global Telecoms Leader — Transactions and TMT Leader, Nordics +46 8 520 593 90 staffan.ekstrom@se.ey.com

Arjan Groen Operational Transaction Services Netherlands +31 884 071 087 arjan.groen@nl.ey.com

David Hedley US Technology M&A Leader +1 415 984 7128 david.hedley@ey.com

Neil Hutt United Kingdom +44 1189 281535 nhutt@uk.ey.com

Transaction Advisory Services (TAS) technology contacts

Ben Kwan TAS and TMT Market Segment Leader Greater China +852 2849 9223 ben.kwan@hk.ey.com

Simon Pearson United Kingdom +44 20 7951 0418 spearson@uk.ey.com

Barak Ravid Co-Leader Technology, Parthenon-EY +1 415 894 8070 barak.ravid@ey.com

Dr. Carsten F. Risch Germany +49 30 25471 21426 carsten.risch@de.ey.com

Eric Sanschagrin TMT Transaction Advisory, EMEIA +44 207 951 9650 esanschagrin@uk.ey.com

Global Technology Sector

Greg Cudahy Global Leader — TMT Technology, Media & Entertainment and Telecommunications +1 404 817 4450 greg.cudahy@ey.com Technology service line leaders

Jeff Liu Global Technology Industry Leader Transaction Advisory Services +1 415 894 8817 jeffrey.liu@ey.com

Channing Flynn Global Technology Industry Leader Tax Services +1 408 947 5435 channing.flynn@ey.com

Dave Padmos Global Technology Industry Leader Advisory Services +1 206 654 6314 dave.padmos@ey.com

Guy Wanger Global Technology Industry Leader Assurance Services +1 650 802 4687 guy.wanger@ey.com

Capital Confidence Barometer | 11

About theCapital Confidence BarometerThe Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas — EY’s framework for strategically managing capital.

The Barometer is a regular survey of senior executives from large companies around the world, from many industries, conducted by the Economist Intelligence Unit (EIU).

• In February and March 2016, we surveyed more than 1,700 executives in 45 countries.

• In this survey, we had 182 respondents from technology companies, of which 55% were CEOs, CFOs and other C-level executives.

• Technology companies’ annual global revenues ranged from: less than US$500m (39%); US$500m–US$1b (23%); US$1b–US$3b (12%); US$3b–US$5b (9%); and more than US$5b (17%).

• Global company ownership was as follows: publicly listed (68%) and privately owned (32%).

Our latest Global Capital Confidence Barometer continues to find a strong acquisition appetite together with a growing inclination to forge new alliances. Prolonged economic challenges are driving investment decisions and leading companies to ally and co-operate for growth as well as compete and acquire for market share. Connect with us at ey.com/ccb.

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