With Cisco and Pitney Bowes announcing big acquisitions Thursday, buyout activity is giving nervous IT investors something to think about besides the volatility that has hit stock markets – and tech companies – since the big sell-off two weeks ago.
A plunge in share prices in Asia at the end of February caused panic selling around the world, and shook up confidence in the technology sector. But mergers and acquisitions (M&A) activity, already at a high level last year, has continued unabated. Most observers think this is a sign of underlying confidence in technology – or at least in certain aspects of the IT sector.
"There's a land grab going on," at least in certain hot areas of the tech market, according to Eric Gebaide, managing director of Innovation Advisors, a New York investment firm.
One hot area is SaaS – software as a service. While software as a service was once the territory of specialised upstart companies, major vendors are now scrambling to offer enterprises SaaS services. Cisco's $3.2 billion planned buy of WebEx Communications, a maker of web collaboration technology, was explained in this context.
Cisco officials said the acquisition is an investment in a platform for intelligent network technology, and hastened to add that the company's subscription based pricing model would be extended. This is a clear formula for SaaS.
Webex shares skyrocketed on the news, closing at $56.38, up by $10.18 for the day. Cisco shares were down slightly, dropping $0.04 to $25.81. Often, acquiring companies' share prices suffer, since big acquisitions can dilute earnings. Considering the high price tag that Cisco is paying, the small drop indicates confidence in the move.
Pitney Bowes's announcement that it plans to acquire MapInfo, a vendor of location intelligence technology, for $408 million, was not as glitzy as the Cisco-WebEx deal. But along with other deals, it's another indication that projections for another big year in M&A are on target. Vendors are under pressure to offer complete products-and-services packages, according to Brian Farrar, a managing director at Innovation Advisors.
Pitney Bowes said the acquisition will round out the mail and document services it already offers.
Also on Thursday, Ericsson announced it will acquire Swedish messaging technology maker Mobeon in an effort to offer innovative integrated messaging products. Mobeon develops internet protocol (IP) voice and video software. The move was at least initially applauded by traders, as Ericsson depository receipts on the Nasdaq exchange closed at $35.33, up by $0.05.
As long as valuations are reasonable – not too high or too low – M&A activity is seen by most analysts as a sign of a healthy lending regime and confidence in new products and services.
Judging from reaction to the deals announced so far this year, the buyouts are being taken as a sign of good things to come.