This bidding war between HP and Dell for 3Par says something to me about big technology companies: They are stuck. They can’t grow internally, so they have to look outside the company.
If you think about the evolution of all big industries, they trend toward consolidation and giant companies eating up new companies in the search for growth and innovation. This certainly appears to be the case with players like HP, Dell, Microsoft, and Cisco. The new innovation is not coming from within, it’s coming from outside.
Does that mean we have a massive M&A boom ahead of us in technology? Well, it’s actually already been happening. Think of Oracle buying Siebel, SAP buying Sybase, and Microsoft trying to buy Yahoo (and failing). Even Google has gotten into the act, as you can see their growth strategy is focused on M&A through purchases such as YouTube, AdMob, and Slide. And Cisco has been active in the video space, buying Scientific-Atlanta, WebEx, Tandberg and today putting forth a smallish deal with the purchase of ExtendMedia.
Why is it that big companies have such a hunger to acquire? Part of the reason is for whatever reason, it becomes harder and harder for them to innovate as they get larger. Cisco has always been an acquisition-driven company, but that even acclerated in recent years. Most of the company’s new product has come from big acquisitions — they have not been very successful at internal product development for the last five years.
Does this mean you run out and buy smaller technology companies that are going to be gobbled up? You’d have to do that very selectively. Technology shares have appreciated rapidly, and actually the data show that M&A booms typically come when markets are frothy, not when they are down.
Don’t believe me? Look at the M&A frenzy at the top of the technology and telecom bubble of 1999/2000. There was also a mini boomlet in M&A from 2005-2007.
Yes, this seems conterintuitive, but it’s true. James Stewart of the Wall Street Journal supported this argument with a very well thought out column yesterday.
So be wary the M&A trend. It’s could be heading in the opposite direction of the market. And those smaller firms that could be gobbled up are getting richer valuations. Yes, I think more deals are on the way, but some careful anlaysis and careful examination of valuation should precede which stocks get pegged as takeover candidates. I am doing more research and will write some more about this next week.