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.
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.
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.