5 Tough Sells in the Tech Sector
NEW YORK ( TheStreet) -- Technology M&A has surged in the last twelve months, even as many of the largest rumored deals failed to catch a bid, signaling that those trying to profit off of merger activity have to check their thinking.
Oracle(ORCL) , Intel(INTC) and IBM(IBM) played a key role in driving the M&A market in the last year, but rumored mega deals never materialized. The gap in expected deals and actual mergers is a sign of wider disconnect in what investors may see as cheap companies and what C-suite executives see as ones that can offer innovation and drive profitability.
As tech titans like IBM, Apple(AAPL) and Google(GOOG) drive near or past record highs, competitors like Yahoo!(YHOO) , Hewlett Packard (HPQ) , Research In Motion (RIMM) spent 2011 at or near post-crisis lows. In a past age, such valuation gaps would have paved the way for an all-stock mega merger boom embodied by HP's $25 billion acquisition of Compaq in 2001.
For tech giants that have found hard luck and falling shares, it may be time to question whether lower prospective takeover prices justify a recent flurry of deal rumors. With declining market shares or waning earnings, struggling tech companies may not look as attractive as many would expect, regardless of how far their stocks fall. A look at recent large deals shows tech acquirers are more interested in buying even premium priced growth opportunities over opportunistic value plays.
In the second half of 2011 and early 2012, the industry's most deal hungry minds spent their precious cash to buy premium-priced, high growth companies like SuccessFactors(SFSF) , DemandTec(DMAN) and RightNow Technologies (RNOW) .
Overall, premiums in U.S. Technology M&A deals increased to 32.6% on $60.6 billion of deals in the last 12 months, according to Bloomberg data, a lift from $46.9 billion of tech deals cut at a 21.6% premium a year prior. That's a larger gain than the 14% boost to the Technology Sector SPDR (XLK) , as a 2012 tech rally has pushed the sector to a 20% index weighting in the S&P 500 .
The conflict between what is and what looks like a takeover candidate has to do a lot with the companies looking to make acquisitions. Industry heavyweights in IT services, mobile hardware and Web advertising have strong cash generating abilities and presence in their respective markets. In a deal, companies like Oracle, "are trying to plug the holes that they have and foresee in the future," says Sachin Shah, a special situations analyst with Tullet Prebon.
For instance, Intel was the most active acquirer in the last 12 months, cutting 23 separate deals according to Bloomberg data. But the world's largest chip maker disappointed investors hoping it would cut a mega-deal like going after NVIDIA(NVDA) . The company spent $26.3 million on average in its deals, putting its total at just $605 million.