In a bid to transform that torrent into profits, a cash rich industry is poised to surpass 2011’s almost $200 billion volume of announced mergers and acquisitions as companies such as Cisco and International Business Machines Corp. search for deals that will boost their capacity to provide new storage, analytics and security services to enterprise customers.
Big data, mobile and cloud technologies will drive “bold investments and fateful decisions,” market researcher IDC said in a recent report. The volume of digital information may balloon from 2.7 zettabytes this year — the equivalent of filling 2.7 billion of Apple (AAPL) Inc.’s priciest desktop iMacs to capacity — to 8 zettabytes by 2015, according to IDC.
“The speed at which technology innovation moves is such that you can’t miss a step,” said Jon Woodruff, the San Francisco-based co-head of technology investment banking at Goldman Sachs Group Inc., the industry’s top adviser on deals last year. “Every tool has to be used for speed and nimbleness sake, and M&A is one of those significant tools.”
Abundant cash and investor pressure to jumpstart sales growth will also propel deal-making. Cash levels have expanded 21 percent in the past year to $513 billion, based on holdings of the 35 members that comprise the Morgan Stanley Technology Index.
Large companies will be leading the charge. Hewlett-Packard Co. (HPQ), Google Inc. (GOOG) and Microsoft Corp. (MSFT) led a 36 percent gain in technology deals last year, outpacing an advance of about 4 percent for all M&A worldwide, according to data compiled by Bloomberg.
In one of the biggest deals last year, Hewlett-Packard agreed to buy Autonomy Corp. for $10.3 billion in a bid to build its software business and scale back on its PC manufacturing. Though viewed negatively by some investors, the move will enable Hewlett-Packard to offer database search services and other cloud-related services for business. Chief Executive Officer Meg Whitman said in November that the company doesn’t plan “large M&A” this year, though it may seek small software deals.
Cisco, which has made about 150 acquisitions in its history and has $44.4 billion in cash on the balance sheet, said in November it will “continue to be aggressive in acquiring technologies.”
Cisco shares fell 0.6 percent to $19.97 at 11:04 a.m. in New York.
“This year’s technology deal volume could be bigger than last year’s and 2007’s,” said Chet Bozdog, global head of technology investment banking at Bank of America Corp.
Industry takeovers in 2007 reached $264.4 billion, the biggest year since 2000’s record high of $585.2 billion, data compiled by Bloomberg show.
“Convergence between hardware, software and services will continue to add products to the same sales chains,” said Bozdog, who is based in Palo Alto, California.
Cloud computing, which allows companies to access information over the Internet from external data centers, and desktops’ shift to mobile devices, will continue to be “huge multiyear trends,” said Drago Rajkovic, head of technology mergers and acquisitions at JPMorgan Chase & Co.
As part of this trend, SAP AG (SAP), the largest maker of business-management software, agreed to buy SuccessFactors Inc. for $3.4 billion in December to create a “cloud powerhouse,” co-CEO Bill McDermott said at the time.
Google announced in August it would buy Motorola Mobility Holdings Inc. for $12.5 billion in its largest acquisition, gaining mobile patents and expanding in hardware. Microsoft purchased Skype Technologies SA for $8.5 billion in October, the biggest Internet takeover in more than a decade, in an effort to catch Google in online advertising and Apple in mobile software.
While Google and Microsoft paid in cash for their deals, the purchases didn’t put a dent in their funds. Microsoft’s cash and equivalents jumped 41 percent from a year earlier to $51.7 billion, based on its latest filing, while Google increased cash by 28 percent to $45.4 billion.
Apple, which has no debt and the most cash among technology companies at $97.6 billion, said Jan. 24 that it is discussing ways to spend its funds and would consider acquisitions.
“There’s more cash in technology than in any other sector and the low level of debt makes it very easy for companies in the industry to buy growth,” said JPMorgan’s Rajkovic, who is based in San Francisco.
As cash piles have increased, some potential targets have become more affordable. Shares of F5 Networks Inc., (FFIV) whose software helps companies manage Internet traffic, lost 18 percent of their value in 2011 even as sales grew 31 percent. Riverbed Technology Inc., (RVBD) a provider of equipment to boost networks’ speed, fell 33 percent while revenue increased 32 percent. Shares of Acme Packet Inc., (APKT) a maker of devices that help networks transmit phone calls and video, dropped 42 percent last year while sales jumped 33 percent.
“You will see more M&A than last year with some very strategic technology companies involved as valuations have become more reasonable,” said Larry Sonsini, who co-founded Wilson, Sonsini, Goodrich & Rosati LLP, the law firm that brought public Apple in 1980.
With stock prices sinking, some investors are also losing patience. Third Point LLC, the hedge fund run by Daniel Loeb, built a 5.3 percent stake in Yahoo! Inc. (YHOO) last year, demanding two board seats and asking co-founder Jerry Yang to step down as director — a goal achieved on Jan. 17. Meanwhile, Yahoo is in talks to sell stakes in China’s Alibaba Group Holding Ltd. and Yahoo Japan Corp., a person close to the matter said last month.
Hewlett-Packard added activist investor Ralph Whitworth to its board Nov. 18, after his Relational Investors LLC accumulated 17.3 million of the company’s shares, which last year lost 39 percent of their value. Brocade Communications Systems Inc. (BRCD), in which Elliott Management Corp. has a 7.5 percent stake, has gained 14 percent since the beginning of the year on renewed reports of a potential sale.
“Volume last year was much higher than in 2010, and we expect this year to be the same or slightly larger,” said Goldman’s Woodruff.