How to play tech merger mania
$126 billion in deals can’t go unnoticed
Tech companies are up for grabs, and when so much cash is sloshing around, it pays to pay attention.
Talk about a flurry of mega tech deals. Computer chipmaking giant Intel stepped up last week with a $17.8 billion buyout of rival Altera. That comes just a week after computer chipmaker Avago snapped up Broadcom in a record-breaking move for the tech industry at for $37 billion.
And the wheeling-and-dealing keeps coming. Dish Network is reportedly considering buying TMobile. Salesforce.com is said to also have been in play as well as smaller companies such as Yelp.
All told there have been $126.3 billion in U.S. targeted tech deals this year so far, says Richard Peterson of S&P Capital IQ. That’s up 104% over a year ago.
“Finding money to do tech deals is pretty easy,” says Doug Sandler of RiverFront Investment. “We’re in a world where access to capital is not a limit.”
The phenomenon has some telling ramifications for investors, such as:
Dealmaking can be extremely lucrative. Shares of the tech stocks in the Russell 3000 targeted in buyouts the past 12 months have jumped 16% from the day before the deals were announced to the day after. Big pops in the stock are a reason why investors pay close attention to which companies could be up for grabs — even though they’re so hard to predict.
Think beyond just the big tech names. Investors have been piling into the shares of the mega tech names for years, Sandler says, but now the merger game is shifting smaller.
The recent tech deals have centered around companies with an average market value of roughly $1 billion. Sandler says the greatest opportunities for tech investors lie with the smaller large companies and the larger mid-caps. “You don’t just want to own the big tech stocks everyone knows, but have broad allocation,” he says.
Don’t feel like you have to chase the pricey tech stocks. High-profile tech-related companies like video-camera maker GoPro and Facebook might get lots of attention, but that’s not necessarily a good thing for investors. GoPro and Facebook investors are paying $9.50 and $6 respectively for a claim to just $1 in book value at these companies. But there are still plenty of tech stocks trading at much less pricey ratios of less than 4 times book value. Of the 477 tech stocks in the Russell 3000, more than half trade for less than 4 times book values.
Be in it to win it. Predicting which tech stocks will be bought is next to impossible. But don’t let that stymie you. If you’re in the market, you’ll likely to benefit if dealmaking continues to heat up like most expect it to.
The Standard & Poor’s 500 index has gained an average of 5.2% in the one-year period following months that U.S. merger volume topped $200 billion, Peterson says. U.S. companies were targeted in $235 billion in deals in May 2015, Peterson says.
It’s not a guarantee — as investors following the 2000 merger binge learned from the ugly market that ensued.
But the fact that companies are seeing value in the market is a sign of confidence. Mergers “underscore the valuation attractiveness out there,” Sandler says. “It’s another scoring that there’s value in the market.”
“You don’t just want to own the big tech stocks everyone knows, but have broad allocation.”
Doug Sandler, RiverFront Investment