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Don’t Expect a Tech M&A Parade — Yet

The conditions are getting there, but the market needs to perk up


Tech mergers and acquisitions have been pretty meager for the past year, though lately, things are heating up.

For example, this week Microsoft (NASDAQ:MSFT) agreed to shell out $1.2 billion for Yammer, which is a hot social tools provider. And we’ll likely see more of these types of deals for the rest of the year, as there’s some key drivers at work.

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First of all, the tech industry is undergoing a variety of major changes. These include the cloud, mobile and, of course, social networking. As should be expected, the large tech companies — like Oracle (NASDAQ:ORCL), SAP (NYSE:SAP), IBM (NYSE:IBM) and Microsoft — have so far missed these megatrends to varying degrees. Of course, that’s not necessarily a problem, as they all have huge amounts of cash and can monetize the deals with their large distribution footprints.

Also, the terrible Facebook (NASDAQ:FB) IPO might spur some dealmaking. The offering took $16 billion out of the financial system, which means there is little left for other companies. In fact, at a conference last night, Goldman Sachs’ (NYSE:GS) co-head of investment banking, Anthony Noto, said the market probably won’t see another Internet public offering before Labor Day.


Noto also noted that there will be “reset” in valuations, following the cadre of other Internet IPOs that have seen big drops, including Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA).

Because of this, many privately held tech companies will be in a bind. If they go to seek more funding, it likely will be at a much lower valuation than they could’ve commanded just months ago, and an IPO probably won’t be an option, either. So the best choice remaining for many companies likely will be to simply sell out.

Still, don’t plan for the M&A parade just yet. Before that can happen, both the economy and stock market will need to show more signs of strength — both are necessary to get CEOs more confident in pulling off deals.

In the short term, M&A activity will be mostly about opportunistic transactions, with a focus on quality companies. It might not be exciting, but it could help large tech companies make the transitions to new technologies without having to pay premium valuations.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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