By Angus Loten 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 14, 2019).

The ongoing race among firms across all industries to ramp up digital capabilities pushed both the value and volume of mergers and acquisitions last year in the global enterprise-software sector to a five-year high, according to a new report.

The flurry of activity also points to the increasingly tight labor market for skilled information-technology workers, with acquisitions offering a source of ready-made talent for beleaguered chief information officers and other corporate tech recruiters, acquisitions advisory firm Hampleton Partners reported this week.

The total value of disclosed deals for enterprise software firms hit $182.2 billion in 2018, the highest level since 2013, while deal volume rose to a total of 1,241, up from 1,050 in 2017, the report said.

The deals include acquisitions of enterprise-software and other tech firms over the past year by large industry players, such as Microsoft Corp., Oracle Corp., Salesforce.com Inc., Adobe Systems Inc. and SAP SE.

The biggest disclosed deal last year was International Business Machines Corp.'s $33.4 billion all-cash purchase of software-and-services provider Red Hat Inc., announced in October, the report said. Second place went to Broadcom Inc.'s deal to buy CA Technologies, an IT management software maker, for $18.9 billion.

There was also steady M&A activity last year in the IT and business services sector, driven by the expansion of cloud, internet of things and data analytics, Hampleton Partners said in a separate report earlier this week.

The rising number of deals indicates that many tech firms are taking a "buy rather than build approach, purchasing companies and their expertise," the report said

But the uptick in deals is also being spurred by businesses outside of the tech sector as they try to stay ahead of competitors' tech capabilities, Miro Parizek, the advisory firm's founder and principal partner, told CIO Journal.

Though most acquisitions last year involved large tech firms, he said, "it is absolutely both." Non-tech firms accounted for roughly 10% of all tech-related deals in 2018, the firm said.

Mr. Parizek calls the uptick in deals a "land grab" for innovative software and IT companies.

Similarly, Bain & Co. estimates that companies struck M&A deals worth a total of $3.4 trillion globally in 2018, about half of which it described as "scope deals" -- those in which a company obtained new capabilities or access to new markets from an acquired business.

These deals outpaced what Bain refers to as "scale deals" -- which seek to boost the buyer's share of a market in which it already operates -- for the first time in four years, the accounting firm said.

Acquisitions aimed at expanding a company's tech capabilities have "increased to roughly 15% of all strategic deals valued at more than $1 billion in 2018, compared with 2% in 2015," Bain said in a January report.

"Companies and organizations across industries are pursuing M&A as one of many avenues to stay competitive in the digital era," said Mohamed Kande, a vice chairman and advisory leader at PricewaterhouseCoopers.

He said acquisitions can speed up a company's efforts to gain necessary technology and skills but should not be done at the expense of neglecting the development of internal tech talent.

"Investing in employee upskilling shows the workforce the commitment you're making in their development while also achieving the objective to expand the organization's capabilities," Mr. Kande said.

Chris Pick, chief marketing officer at Apptio Inc., a software company that was acquired by Vista Equity Partners last year in a $1.9 billion take-private deal, said the recent shift toward tech market consolidation is "absolutely being driven by the shifting role of the CIO."

Mr. Pick said as CIOs expand their oversight from back-office support to business strategy, they prefer working with fewer but more strategic tech vendors. When it comes to M&A activity, he added, CIOs are being called upon to bridge the gap between IT and lines of business in gauging the value of a deal.

"Organizations need to quickly understand what they have, where it is, who is using it, what vendors are involved and how to optimize the new portfolio" in the wake of an acquisition or merger, Mr. Pick said.

Mr. Parizek said he anticipates continued growth in M&A across the enterprise software and IT sectors in the year ahead, driven by advances in artificial intelligence, machine learning and other emerging digital tools.

Write to Angus Loten at angus.loten@wsj.com

 

(END) Dow Jones Newswires

March 14, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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