The second tech bubble: we’re certainly not out of the woods yet

11 Jul 2014

At the end of the first quarter of this year, fears of a new tech bubble prompted a widespread sell-off of tech stocks and shares took a nosedive. We’re certainly not out of the woods yet, global accountancy firm BDO has warned.

A quarterly technology review by BDO indicates there are plenty of jitters since equity and IPO markets cooled since March when fears of a bubble prompted a sell-off of tech stocks.

Overvalued shares took a nosedive toward the end of Q1 and in early Q2 investors pulled their money out and invested in dividend payers and slow-moving blue chip stocks.

David Einhorn, founder and president of Greenlight Capital, a hedge fund with US$10.3bn of assets under management wrote to his clients: “There is a clear consensus that we are witnessing our second tech bubble in 15 years.”

The review points to a slowing in IPO activity. A total of 14 tech-related IPOs launched in the first quarter.

However, there were only four new IPOs in the pipeline as of mid-May.

Most of the technology IPOs had strong debuts only to see their share prices tumble towards the end of the quarter and into Q2.

All software stocks launched in Q1, including Varonis Systems and Paylocity, finished the quarter below their debuts.

Another company prompting bubble talk is London-based King Digital Entertainment, makers of Candy Crush, which was initially valued at US$7.1bn and the most talked about offering since Twitter’s IPO in November.

The stock dropped 16pc on its first day of trading dragging other gaming stocks like Zynga down.

Despite having 180 games, King Digital Entertainment could prove to be a one-hit wonder and follow in the footsteps of FarmVille-maker Zynga which has performed poorly on the public equity markets.

M&A activity

Mergers and acquisitions in the global tech industry had a stellar first quarter, up 55.1pc from last year.

With a total value of US$54.3bn, it was the highest total value for an opening quarter since 2000, according to Mergermarket.

According to data from PitchBook and The Deal, a total of 211 tech related M&A transactions closed in Q1 with 158 in North America, 44 in EMEA and nine in Asia.

VC activity in technology is booming with overall investment hitting its highest quarterly mark since Q2 2001, according to CB Insights.

Some US$910bn was invested across 880 deals in North America alone, where there was a 44pc increase in funding and a 5pc increase in deal activity.

Bankruptcies and a warning

Yet, while all this deal making has been going on bankruptcy volumes reached a total of 90 in Q1 according to The Deal.

Among the bankruptcy announcements were 16 clean tech companies out of which four were solar tech companies. The hardware space saw 31 bankruptcies while there were 18 bankruptcies in managed service and six in fin tech.

The BDO review said it remains to be seen whether the tech market correction will continue into a bear market over the coming months as interest rates continue to rise.

Many analysts also expect stocks to drop between 10 to 20pc in the second half of the year which would likely affect deal activity in the tech sector.

While tech companies are adept at quickly adapting and innovating to stay ahead, they are warned to take the time to carefully assess opportunities for growth before taking action.

“The global recovery means we can continue to be encouraged about the prospects for the technology sector,” said Julian Frost, global head of technology sector at BDO.

“A desire to stay at the forefront of product and service innovation, ever converging technology subsectors and the need to expand globally will give cash-rich corporates the stimulus they need to invest in both tactical and strategic M&A opportunities.

“We are certainly not out of the woods yet, but we remain confident that the interest and opportunities available should help ensure strong growth in the tech corporate markets through to 2015.”

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years