Mergers and acquisitions have become part and parcel of the modern tech landscape and experts don't see that stopping any time soon.
After IBM (IBM) announced its $34 billion takeover of Red Hat (RHT) on Sunday, many marveled at the size of the deal, which marks the largest software company acquisition in history.
The deal comes into focus as a symptom of the overall technology landscape when considered in the context of the number of acquisitions made this year. These include Salesforce.com's (CRM) $6.5 billion buyout of MuleSoft, Microsoft's (MSFT) $7.5 billion grab of GitHub, and Twilio's (TWLO) $2 billion deal for SendGrid. Blockbuster acquisitions might be the new normal.
"The volume of M&A in software appears to be picking up, with over 70 transactions announced year-to-date including IBM/Redhat," JPMorgan analyst Sterling Auty wrote in a note on Monday morning. "Interest rates are heading higher so we are ending one of the most lucrative financing phases in the last 20 years."
He explained that the transformational phase of software at the moment makes it an attractive space for companies to continue to acquire companies perceived as being on the cutting edge.
Given the volume of transactions and deal sizes announced in 2018, he declared "nothing is too big" as far as prices put on acquisition targets.
Target Time
Auty made a laundry list of targets he sees as attractive strategically, vertically, or valuation-wise for some of the big fish in technology and software to jump on.
For strategic purposes, he highlighted Okta (OKTA) , Palo Alto Networks (PANW) , ServiceNow (NOW) , RingCentral (RNG) , Aspen Technology (AZPN) and DocuSign (DOCU) as potential acquisition targets.
"Okta offers best in class cloud identity solutions that are very important to the shift of applications to the cloud," he explained. "[While] Palo Alto Networks has emerged as the clear leader in network security and is well positioned for the shift to the cloud."
He added that ServiceNow and RingCentral offer entrées to cloud markets as well from unique angles in helpdesk and workflow and telecommunications respectively.
For the more forward-thinking companies, Aspen Technology was noted as the "the most attractive independent company for IoT (Internet of Things)" and could become an attractive target for companies looking to test the nascent market.
Lastly, he noted that DocuSign could be an important acquisition for companies looking to corner the market on the move of contracts to a primarily digital environment, which could mean bidders outside of software entirely.
"DocuSign has established itself as the category leader for e-signature and is positioned to lead the move to all contracts being managed/executed in a digital format," he said. "Here DOCU may be perceived to be attractive to tech companies, but potentially could be a great fit for certain financial services giants too."
In what he termed the "vertical industry exposure" category, Auty named Guidewire Software (GWRE) , Veeva Systems (VEEV) , Medidata Solutions (MDSO) , Ellie Mae (ELLI) and Q2 Holdings (QTWO) as potential targets for larger companies.
"The attractiveness of the vertical application company has become clear and we could see larger tech companies looking to capitalize on this trend like we saw with Oracle (ORCL) acquiring companies like Phase Forward and Opower," he explained.
He noted that both life science companies and financial institutions would be most likely to seize on the opportunity to integrate vital software systems into their businesses.
Finally, for the companies that offer an attractive valuation for acquisition-happy firms he listed FireEye (FEYE) , Carbon Black (CBLK) , SecureWorks (SCWX) , Akamai Technologies (AKAM) and LogMeln (LOGM) as potential candidates to get acquired.
FireEye has been the subject of buyout speculation from Facebook (FB) as of late as the social media giant seeks to shore up its defenses after a year of scandals and scrutiny.
As Bill Conner, CEO of SonicWall told TheStreet in a video interview, the pace of acquisition in cybersecurity is likely to pick up because of a skills gap in software. The combination of the factors makes FireEye all the more attractive to speculators as rumors abound.
While tech has been a battered sector recently, the pace of acquisitions made this year, that look to continue, should buoy some buying in the group as speculators try to take aim at the next company that might fetch a 60%-plus premium.
