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M&A Trends During the "00s"

We still have to wait a couple of months before this year's Software Industry Survey data is collected, so I decided to do a warm-up exercise using data from the Zephyr mergers and acquisitions database.

In last year’s Software Industry Survey report we highlighted consolidation through mergers and acquisitions as on of the main trends in the software industry. Now that the first decade of the 2000s is behind us, we can have a look at how the trends of mergers and acquisitions have changed during that era. 

I identified 629 deals related to the Finnish software industry using the following criteria:

  1. Either the target or the acquirer is a Finnish company
  2. Either the target or the acquirer is a software company
  3. The deal is either a merger or an acquisition, excluding other types of deals such as IPOs
  4. The deal was made between 2000 - 2010

The main graph created from the data shows the number of M&A deals divided into three categories: 1) deals between two Finnish companies; 2) deals where only the acquirer is Finnish; 3) deals where only the target is Finnish.

M&A Deals in Finland 2000 - 2010

Interestingly, this plot suggest that the number of M&A deals from abroad to Finland has been greater than from Finland to abroad, except in 2009. Considering the recent discussion on acquisitions in the industry and a recently published Talouselämä article (Suomi kutistuu ideariiheksi) arguing that a large share of the best IT ventures are sold to foreign byers too early, this figure paints a very different picture. According to this dataset, Finnish firms have been more active in acquiring foreign firms than foreign firms acquiring Finnish companies. 

A quick comparison of domestic and international M&A deals shows that while the number of international deals has been quite stable, more variation can be seen in the number of domestic deals, which peaked in 2005 and were at the lowest level during 2008. 

Next I focused on what Finnish companies are the most active acquirers. These were naturally the largest companies operating in the IT sector: Tieto and Nokia were by far the dominant buyers of software companies. When I eliminated these and other publicly traded Finnish companies in the dataset (225 records), the picture is a bit different:

M&A Deals in Finland 2000 - 2010 excluding Oyjs

 

Here, the net flow of acquisitions seems to be clearly out of the country during 2005 - 2009, but into the country again in 2010. We should not hasten to conclude that the year 2010 is a change in the trend. The change in the balance of international deals in 2010 can be due to natural variation or incomplete data, as the Zephyr database will have some missing information for the latest years.

In all, the potential threat of “idea bleeding” raised by the Talouselämä article cited earlier is probably true to some extent. The article outlined a rising problem of the IT sector where new and promising but immature IT ventures are sold abroad. If a venture with a lot of unrealized potential is sold abroad, then a large share of the value that the company can create is actually lost from the Finnish society. However, there is also another side of the coin: Many young firms need more resources to grow to a sustainable size than what they can get as independent companies. If a company is not one of the largest players when a market starts to consolidate, “selling out” can be the only viable strategy.

This quick analysis raises some questions about the near future:

  • Will the number of M&A deals keep increasing after the financial downturn of the late "00s"?
  • Are we going to see more or less international acquisitions by Finnish companies?
  • Is the number of international deals going to remain on its stable level?
  • How do Finnish software companies assess the international M&A or exit opportunities?

In this year’s Software Industry Survey, we will have a special section of focusing on M&A activities, hopefully answering some of these questions.