Value of PE-Backed Tech M&A Jumped 60% in Q2

Private equity investment in technology surged in second quarter.

There were 777 tech M&A deals in second quarter valued at $52.1 billion. This is nearly double the value of the 628 deals that occurred in Q2 of last year that totaled $30.8 billion, according to Ernst & Young’s “Global Technology M&A Update.”

PE showed a marked rise in transaction values. There were 76 PE-backed tech deals in Q2 valued at $8 billion. This is up 60% from the 51 deals in Q2 2010 that totaled $5 billion.

A rebounding economy helped corporate and PE deals surge in Q2, says Joe Steger, Ernst & Young’s global technology transaction advisory services leader. “As the economy has been improving, stock prices and valuations have risen,” Steger says. “Private equity has a lot of cash to invest and they’re looking for opportunities to deploy it.”

However, private equity was still a small part–about 10%–of the overall number of deals. Steger says that corporate buyers typically acquire many small tech companies in emerging technologies like cloud computing, software as a services, social networking and smart mobile apps. “These companies do not have a history of profitability,” he says.

In second quarter, software was the most popular place for PE firms to invest. A little more than half, or 54%, of PE deals were in software, says Steger. In fact, PE’s biggest investment–Golden Gate Capital’s $1.8 billion buy of Lawson— was a software deal. Other notable software deals include Apax Partners $2 billion buy of Epicor Software and Activant Solutions. Providence Equity Partners also bought SRA International in Q2 for $1.8 billion.

PE firms like software “for the recurring cash flows that come out of the maintenance base,” Steger says.

Buyout shops also liked IT services, which comprised 21% of PE deals in Q2. Examples include Providence’s buy of SRA. PE firms like IT services because it’s “more of a business they can get their arms around and get more stable cash flows,” Steger says. “They don’t have to worry about technological obsolescence as much compared to other sectors.”