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Tech's 2013 M&A Boom May Have Just Materialized

7 June 2013 in Trading Ideas

A funny thing happened earlier this year amid the calls for continued stability in the technology merger and acquisition market in 2013: deal activity and value amount fell off a cliff.

A recent study by Pricewaterhouse Coopers recently put the drop in first-quarter M&A activity at 38% compared with a year earlier.

However, after months of relative tumbleweeds blowing through the tech merger fields, signs of life have appeared:

• Yahoo announced last month that it would throw down $1.1 billion in cash on popular blogging service Tumblr

• IBM said early last week that it was acquiring cloud-computing storage provider SoftLayer Technologies in a deal valued at $2 billion. The move was seen as part of IBM’s strategy to better compete with Amazon.com

• Customer-management software behemoth Salesforce.com announced last week its plan to spend $2.5 billion on online marketing firm Exact Target

That last deal gave a decent boost to the Tech Takeout Targets motif, which includes Exact Target as its largest (5.6% weight) component within its portfolio of stocks. The motif is up 3.2% in the past month, and is up 12.8% this year, and 1.9% since its August 31, 2013 inception.

tech takeout targets

So, following this recent spurt of deals, is it back to tumbleweeds or can we expect a steadier flow of M&A activity for the rest of this year?

According to a recent study by PricewaterhouseCoopers, it’s more of the latter. PWC analyst Rob Fisher, who admittedly called the paucity of tech mergers in the year’s first quarter “somewhat of a surprise”, said his firm’s clients see the dearth of early-year deals an “aberration,” and he expects that the continuing strength in corporate balance sheets and fundamentals to ultimately help a pick-up in second-half tech mergers.1

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And, though, it was a lean first-quarter, it may be instructive that more than half of the tech deal volume came from the software sector. According to PwC, deals in that sector were driven by firms across industries investing in software-driven functionality and automation in products and services.2

If the trend really is turning up for merger activity, high-growth software companies may be a good place for investors to be looking.

1“Will Tech See Better M&A In Second Half?,” Bloomberg.com, May 20, 2013, http://www.bloomberg.com/video/will-tech-see-better-m-a-in-second-half-Wetm0GWFRISIhBRtMCphFQ.html, (accessed June 5, 2013).

2“Technology M&A decline 38% in first quarter of 2013: PwC,” Computer Business Review, May 1, 2013, http://www.cbronline.com/news/technology-ma-decline-38-in-first-quarter-of-2013-pwc-010513, (accessed June 5, 2013).