The top nine tech companies account for over 13% of the S&P 500 index.
The top 9, Intel, Apple, Cisco, Oracle, Hewlett-Packard, Microsoft, IBM, Qualcomm, and Google, all have massive amounts of cash available for investment.
These companies alone have over $150 billion of free cash which represents on average of approximately 13% of their overall market cap.
It's easy to see how billion-dollar companies can be acquired without damaging the cash position of these technology giants.
Lets look at a few companies and their M&A tendencies:
Hewlett-Packard
Mark Hurd was focused on operations and efficiency and did not invest heavily in research and development. Perhaps that's why they so aggressively chased 3PAR and continue to do all they can to emulate IBM's one-stop shop business model by acquiring niche players. That was the rationale for the purchase of EDS. Buying Palm was just another example of Hewlett-Packard buying into a space to try to stay competitive (in this case Apple and Google). Expect more buys.
Oracle
Long known as a serial acquirer, Oracle has invested over $30 billion on 60 acquisitions including PeopleSoft, Siebel Systems, Hyperion Solutions, BEA Systems, and Sun Microsystems. Their overall strategy is to use profits from its cash cow database business to expand into other areas of the enterprise computing space including application software and middleware. The company has proven to be an effective integrator of purchased companies. We see no reason why their zeal to consolidate the technology business will not continue. Do you really think Larry Ellison is done conquering the world?
Apple
With a massive trove of cash, the world awaits Apple's first foray into mergers and acquisitions. Yes, they have purchased small companies but the size of these buys is a fraction of the overall cash hoard Apple currently holds. Will they buy Sony or Adobe as was rumored recently? Probably not, but you can be sure that they are scanning the marketplace looking for opportunities.
Google
Google is leveraging its share price and acquiring other companies at a breakneck pace. Many of these purchases are considered additive to their overall core business of search, browsers, and now the Android operating system. We expect Google to continue to push forward with acquisitions as they seek to supplant Microsoft as the dominant operating system player across multiple platforms.
So what's your next step as an investor to participate in this growing trend of consolidation?
- Identify companies that can acquire intelligently and integrate businesses into their current business model.
- Look for synergy and cost effectiveness.
- Watch for companies with vision; understand the strategy
It's a bit more difficult to identify companies that might be acquired, particularly given the tendency by large technology companies to acquire small, off-the-radar firms to plug holes in their current offerings.
Still, watch for emerging trends and be alert for hot entrants in hot niches (data de-duplication for example).
Consolidation is in the air.
Cash is available and economies are beginning to recover. As globalization touches the technology industry and revenue generated expands beyond developing countries into emerging markets, you can expect a continuation of empire building from technology companies.
Cash will be spent to make this happen; count on it.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.
