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Strategist Breaks Down A Stagnant Tech M&A Scene

Elizabeth Balboa

If you ask Sean Udall, Cisco Systems, Inc. (NASDAQ: CSCO)’s acquisition of BroadSoft Inc (NASDAQ: BSFT) was a long time coming — both for the pairing and for the markets.

“Probably the most surprising thing actually this whole year is how quiet M&A has been, specifically M&A in technology,” the chief investment officer of Quantum Trading said on Benzinga’s PreMarket Prep radio show. “M&A activity has actually been pretty light this year, especially given how cheap the targets are and how rich the companies with the stock currency and the big coffers to buy are.”

By his assessment, the stagnancy is a hindrance even to ostensibly thriving corporations like International Business Machines Corp. (NYSE: IBM), Microsoft Corporation (NASDAQ: MSFT), Intel Corporation (NASDAQ: INTC), Oracle Corporation (NYSE: ORCL) and SAP SE (ADR) (NYSE: SAP).

These large-cap, high-liquidity tech firms need growth catalysts.

“Some of these stocks have performed really well even though the growth is low, but at some point, they need to buy the growth to sort of justify where their stock prices are,” Udall said.

A Stagnant Scene

The inactivity is neither for lack of options nor for lack of capital. Udall identifies a lot of cheaply trading targets and considers the likes of Microsoft financially positioned to close multiple deals.

“Microsoft in three deals could be a leading security company, and in one or two deals they could be a leading data analytics company,” he said. For example, the firm could upgrade its SQL Server with the “vastly superior products” of Splunk Inc (NASDAQ: SPLK), New Relic Inc (NYSE: NEWR) or Varonis Systems Inc (NASDAQ: VRNS).

Big Blunders

When the big firms do make plays, they err in adding insignificant assets, like Microsoft’s purchase of LinkedIn, or waiting to buy until the target’s risen in value.

Such was the case with BroadSoft, whose buyout Udall predicted since 2014 when the premium was more attractive.

“Corporate buyers are just as dumb as the dumbest momentum buyers,” Udall said. “They don’t recognize something until it’s hitting them across the face with a two-by-four.”

Tempting Targets

He expects to see a similar story in Tableau Software Inc (NYSE: DATA) and Ambarella Inc (NASDAQ: AMBA), the latter of which he said should have already been bought by Intel. The “whopper of a deal” would bolster Ambarella’s R&D budget while improving Intel’s market leadership.

Firms like Splunk are also palatable for their “massive” total addressable markets far exceeding current market penetration, Udall said.

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