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Tech M&A Pace Stays Sizzling

4 March 2015 in Trading Ideas

Last year was a big one for technology merger activity, with global deals totaling $293 billion – a jump of 50% from 2013.

Experts have predicted that 2015 will be just as huge, and so far, the flow of deals has suggested that could be the case.

Investor’s Business Daily reported this week that the value of global tech M&A already this year amounts to $55.3 billion, according to a Thomson Reuters analysis. That’s up 9.5% from the same period last year.1

Two heavy-hitting deals were just announced earlier this week, with NXP’s plan to acquire Freescale Semiconductor in a $16.7 million transaction, and an agreement by Hewlett-Packard to buy Aruba Networks for $2.7 billion.

“All tech companies are thinking of what can they do to increase market share or move into new markets,” Matthew Toole, an analyst at Thomson Reuters, told IBD.

Such was the case with HP’s deal for Aruba, a provider of next-generation network access equipment for mobile networks. As part of a major restructuring effort to boost revenue growth, HP is pushing into emerging growth areas such as mobile, cloud computing and security, according to IBD.

It’s a theme across much of the M&A field, with companies buying their way into growth areas, according to a research report by FBR analyst Daniel Ives cited by IBD.

“We continue to believe other, larger technology vendors will seek to acquire their way into higher growth areas of the tech food chain while shedding/spinning off less fertile areas,” said Ives. This list includes Cisco, SAP, IBM, Microsoft, EMC, and Oracle.

Because many tech firms are facing slower growth prospects in legacy businesses, changes in buying behavior among customers, and increased competition, Ives sees a pickup in M&A activity aimed at expanding product offerings, gaining scale and taking out competitors.

As one might expect, the flurry of activity has also lifted the profiles – and stock prices – of smaller tech companies that could be scooped up by larger firms.

The Tech Takeout Targets motif has increased 10.3% in the past month. During that same period, the S&P 500 has climbed 4.8%.

In the past 12 months, the motif is off 1.2%; the S&P 500 is up 16.9%.

The early-year deal flow supports a recent report from 451 Research that expects M&A spending to continue this year at the torrid pace of last year, citing bullish sentiment from corporate acquirers and bankers, a good macro-economic environment and a re-energized private equity market.2

According to 451 Research, 58% of corporate acquirers said they expected their companies to pick up the pace of deal making in 2015. That was the highest forecast by strategic buyers in the tech M&A marketplace in a half-decade.

Likewise, more than three-quarters of investment banking survey respondents indicated that the aggregate value of tech transactions they are currently working on is higher than it was a year ago.

The research group said it expects specifically active markets in information security, mobility and cloud computing.

1Brian Deagon, “Tech M&As Sizzle As Firms Buy Their Way To Growth,” investors.com, March 2, 2015, http://news.investors.com/technology/030215-741629-hp-aruba-nxp-tech-merger-activity-booms-in-2015.htm?ref=SeeAlso.

2Press release, “451 Research report: 2015 Tech M&A on a Path to Continue Record-setting Spending of 2014,” Jan. 27, 2015, http://www.prweb.com/releases/2015/01/prweb12465965.htm, (accessed March 2, 2015).

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