Merryn's Blog

Why HP's latest deal makes me nervous

This week, Hewlett Packard announced an agreement to buy networking equipment maker 3com for $2.7bn. But that doesn't mean you should pile in to HP shares.

Credit crunch, what credit crunch? Yet another monster technology deal has just been unveiled. This week, Hewlett Packard (NYSE: HPQ) announced an agreement to buy networking equipment maker 3com (Nasdaq: COMS) for $2.7bn. Mike Harvey described it in the Times as "the latest in a series of takeovers in the tech sector" that are built on "confidence returning to the market". But I would be wary of piling into HP shares.

First off, despite all the headlines they generate not to mention all the juicy fees for professional advisers plenty of studies have shown that most mergers and acquisitions add little shareholder value. Bad timing is often the problem, as Royal Bank of Scotland's purchase of ABN Amro, or Ferrovial's acquisition of BAA, both just ahead of the credit crunch, demonstrated. And right now global stocks look pretty pricey once again after a huge rally that began in March. Sure, six months ago there were bargains galore, but that hardly looks true now.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

And sure enough, 3com isn't cheap. The all-cash deal values the group at 25 times prospective earnings before interest, tax, depreciation and amortisation (EBITDA). As the FT notes, at that elevated level "a competing bid is unlikely". That's a relief for HP's board (anxious, amongst other things, to play catch up in China via 3com) but perhaps less so for its shareholders.

Next, there's the worry about what recent M&A activity reveals about the IT industry. HP's move is certainly bold. It will allow the firm to replace rival Cisco's kit with 3com' systems and begin to challenge Cisco's dominance.

Advertisement
Advertisement - Article continues below

But there's another, less racy, explanation for what's happening. In an IT industry that has hosted this latest HP deal, and seen Oracle going after Sun Microsystems, is it possible that big-tech CEO's are running out of ideas about where future growth is going to come from? It all rather smacks of firms who have cash, or can raise debt, racing to grab the biggest possible share of a shrinking pie before debt and stock markets deteriorate.

And specifically, it looks rather as though Cisco (who happily focused on switchers and routers until a few years ago) and HP (which has tended to concentrate on servers) are being forced to move onto each other's turf. And that means away from their traditional areas of core expertise. Not a recipe for shareholder satisfaction.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/property/house-prices/600795/uk-house-price-rise-brexit-bounce
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020
Visit/economy/uk-economy/brexit/600778/winners-and-losers-from-a-hard-brexit
Brexit

Winners and losers from a hard Brexit

Our exit from the EU is likely to be of the hard variety, says Matthew Lynn. Investors should back the industries that will flourish
9 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020