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Interrelated M&A and Venture Capital Trends Signal Increased 4Q13 / 1Q14 M&A Activity

By Jon Yim

Venture capital (“VC”) activity has continued to remain strong for both cybersecurity and big data companies.  During the first half of 2013, cybersecurity and big data firms have secured $2.0 billion in funding, representing an 81.0% increase over the first half of 2012.  Similarly, M&A activity for cybersecurity and big data companies has continued at a healthy clip over the past year.  During the first half of 2013, announced deals rose 20.6% over levels seen during the same period in 2012, with 1H13 deals climbing to 82.  Examining quarterly data from 1Q12 – 2Q13 more closely, the relative movements of these respective M&A and venture capital markets have roughly mirrored each other, as VC investors appear to see favorable exit potential from cybersecurity and big data investments.  The relation between M&A and venture capital markets can be seen in the two Figures below.

As illustrated in Figure 1, increases in VC funding levels over the past six quarters have been met with similar increases in M&A activity.  Additionally, as Figure 2 highlights, the number of total funding rounds has acted roughly as a leading indicator of the trends in the M&A market.

Macroeconomic headwinds, including a government shutdown that catapulted many businesses into uncharted territory, led to a sharp decline in M&A activity in 3Q13.  However, the surge in 3Q13 VC funding displays VC firms’ willingness to continue to deploy significant amounts of capital, despite market uncertainties, as they position themselves to capitalize on an expected rebound in M&A activity.

Given the historical VC funding trends illustrated below and 3Q13 VC confidence, we expect to see M&A markets rebound in late 4Q13 / 1Q14 to levels more closely related to that of current VC funding.