The Case for Increased M&A in 2011: Actions and Outlooks

1Executive Summary

The U.S. economy has entered a period of sustained if fragile growth. Companies have reduced hiring even in the wake of the recovery, leaving many of them with rising profits and ample stockpiles of cash. Despite lingering concerns that economic growth could weaken again, companies are opting to deploy their cash in strategic mergers and acquisitions, as evidenced, for example, by Microsoft’s $8.5 billion purchase of Skype in May.

Given that many of the largest U.S. tech companies have cash on hand in the tens of billions of dollars, M&A activity is likely to continue or even increase in 2011. Companies with low stock valuations may be prompted to engage in cash deals rather than stock-financed transactions. Several factors are driving the trend, including industry consolidation, rising competition, corporate brand building, distribution and marketing, and capital needs at target companies.

In this report, we look at the market landscape and strategic factors involved in tech M&A. We then examine five large-cap, cash-rich tech companies likely to engage in technology mergers and acquisitions as well as companies that might offer strategic fits for them. That list includes:

  • IBM, a company in solid shape to ramp up purchases in 2011, despite few deals in recent months
  • Oracle, whose strong financial metrics will help it continue to make high-profile deals, like its purchase of Sun Microsystems
  • Microsoft, which, although it is a well-managed company, needs an innovative spark to appeal to tech investors
  • Cisco, a longtime tech leader whose stock has taken a pounding and is facing strong competition in its core markets of routers and switches
  • Hewlett-Packard, which has shown a willingness to pay a premium for companies it wants, like its 2010 purchase of 3PAR
Next: Methodology
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