The long awaited tech buyout frenzy is finally here, says March Group, a leading M&A firm. Having waited months for tech giants to pluck up the courage, Cisco sounded the gun on Tuesday with a $2.9bn deal for wireless group Starent Networks. “With the economy recovering, buyers will no longer be hesitant,” reckons March’s Carl Doersken. “They will start acquiring the tech firms they’ve been eyeing for some time”.
It’s easy to see why tech investors are so excited. The tech industry is one of the few – along with telecoms and healthcare – to have emerged from the meltdown with a bit of cash to throw around. Having learned some very hard lessons when the industry burned to the ground in the late nineties, tech giants have been quietly rebuilding – hoarding cash, belt-tightening and generally running their business as if they were operating out of a bunker.
There are certainly plenty of thriving companies to choose from. Top of the list of takeover candidates is data storage group Netapp (Nasdaq: NTAP), says James Rogers in The Street. Security groups McAfee (NYSE:MFE)and Symantec (Nasdaq: SYMC) have enjoyed a stellar year as the industry attempts to suppress cybercrime. And demand for netbooks has spurred serious interest in solid-state drives – the light, powerful drives used in hardware such as laptops, digital cameras and MP3 players.
Trouble is, Netapp is already up 100% since we tipped it in February. And the major tech indices are up more than 70% from March. That’s partly down to expectations of a wave of takeovers. But it’s also because investors have been betting that company purchases of replacement equipment will drive sales and earnings growth next year.
But corporate spending remains weak. And it is a hell of a lot more expensive to buy new machines than to fix old ones. So many tech groups have little to support their inflated prices other than the chance of a buyout.
It’s a very dangerous game at this point in the rally to be betting on buyout candidates. You’d be better to focus on sectors that are enjoying solid growth. As we pointed out in a cloud computing cover story back in April, the shift towards centralised computing is a boon for data storage groups. EMC (NYSE: EMC) is up 50% since we tipped it then, but the company is still benefiting from increasing data storage spending.