Major cut-price acquisitions are expected in 2022 as tech stocks plummet
The 'great tech stock selloff' is well underway as investors get jittery over rising interest rates
Board members at large tech companies must consider serious acquisition offers given the current economic climate, said one prominent industry analyst.
The growing bearish attitude towards technology stocks, coupled with rising inflation rates and fears surrounding a potential recession on the horizon, could mean that 2022 will be a year that’s full of mergers and acquisitions (M&As).
Speaking to business and finance broadcaster CNBC on Thursday, Rishi Jaluria, analyst at RBC Capital Markets, said there is a high likelihood that technology companies trading well below their peak could either be acquired by rivals or by private equity firms this year.
“I think, more and more, the boards of directors have to take the acquisition seriously or offer seriously from private equity,” said Jaluria.
“And at the same time, I think some of the larger platform players: your Salesforces, your Microsofts, Oracles and SAPs of the world are looking at some of these multiples coming down so much and saying ‘hey, this is a great time to consolidate some IT spend’ and really take advantage of the major pullback that we’re seeing here.”
It’s not just the price of cryptocurrencies that are trading well below expectations in recent months. The wider tech industry’s stocks have been weakening since at least the turn of the new year and it all came to a head in early May when the US Nasdaq reported its worst monthly performance since the 2008 financial crisis.
The observation was a poignant one for market players and one that has since spurred rumours of another economic recession. Some have even taken to likening the downturn as the second dot-com bubble. With the ‘great tech selloff’ now in full swing, investors are instead looking to put their money into safer bets like green energy.
There’s no doubt that the easing out of the pandemic has rocked the quarterly reports for many of the tech firms that benefited hugely from the mandatory lockdowns. Netflix and Peloton, for example, both saw their shares plummet significantly compared to their 2021 peaks, while Meta and Amazon dropped in a big way too - 40% and 47% drops compared to previous highs respectively.
Inflation rates have a large hand in why investors are growing wary of the current market. As our sister title MoneyWeek noted, the US Federal Reserve is steadily raising interest rates to control inflation in a bid to avoid a recession, but this has, in turn, devalued every kind of asset and the current market performance is tracking closely to that of the original dotcom collapse of 2001 and 2022.
The dips keep dipping and while investors may be sweating, the largest tech companies will surely be readying their M&A teams for hunting season. We’ve already seen some high-profile acquisitions in the first few months of the year, perhaps none more widely reported than Microsoft’s multi-billion-dollar acquisition of Nuance Communications - its biggest since LinkedIn in 2016.
Satya Nadella’s company also announced plans to buy Activision Blizzard and automation specialist Mint. Other high-profile cases include Kaseya’s acquisition of Datto, Intel picking up Tower Semiconductor, and this week’s breaking news that Broadcom is eyeing up VMware.
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In terms of what acquisitions we can expect to see next, Jaluria said there is a number that may appeal to the larger companies and many of the ‘pandemic darlings’ that flourished while everyone was at home may have their tech swept up as valuations fall.
It’s both companies that have had major pullbacks and those who would simply be better as part of a larger platform, he said, that could be ripe for acquisition this year. Dropbox was one of the analyst’s predictions for potential takeover by the likes of Adobe or Salesforce, he said “there is a lot more they could do with the asset”.
Video conferencing giant Zoom and cloud-based contract-signing platform DocuSign were two of the other companies that Jaluria said performed very well during the pandemic, given the nature of their businesses, but have both since seen major pullback since the easing of pandemic restrictions. The analyst said Salesforce would be an ideal candidate to acquire each of these assets.
“I still think Zoom has the best video conferencing technology out there and if it gets owned by a larger company that has the ability to bundle in video as part of other collaboration solutions, I think that increases Zoom’s competitiveness against Microsoft [Teams],” said Jaluria.
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