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Innovation is priced at a premium in the information technology industry

3Q 2015 Information Technology Industry Spotlight

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The global proliferation of relatively cheap, high-quality mobile devices in the past decade is the most evident sign of how much information technology (IT) is reshaping society. That broadening of information channels, now making it possible for companies to tap more markets than ever before, is one of the primary reasons why innovation in the technology sector, and the sector itself, is subject to so much hype and priced at a premium. Particularly in the venture capital (VC) industry, investors are willing to pay up for new products that promise innovation—and the accompanying customers.

Valuations have consequently been driven to consistently high levels over the past few years, especially in private markets. The surge in private billion-dollar valuations, which shows little sign of slowing, has led to much discussion over whether multiples are approaching overly exuberant levels, as some of the most heavily capitalized startups look set to remain private for some time.

The first half of 2015 saw strong M&A activity continue in the U.S., with 386 transactions closed in Q2, for a total of $25 billion in deal value. That dollar sum was a downturn from Q1, but well in line with historical quarterly totals. As prior blockbuster quarters were usually skewed by blockbuster deals, such as WhatsApp, the average M&A deal size declined somewhat to $310 million in the second quarter, but the median stood at $41 million. Since the end of 2013, the median M&A transaction size has remained elevated nearly every quarter, straying below $40 million once.

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