M&A lifts IT as Nasdaq soars

With the first six months of the year gone, IT companies are riding high in the markets, and mergers and acquisitions have helped stoke investor interest in technology.

The tech-heavy Nasdaq Composite gained 7.8 percent in the first half. The day before the U.S. Independence Day holiday on July 4, the Nasdaq rose 12.65 points to close at 2644.95, a six-and-a-half year high.

Most analyst firms are still predicting modest overall global IT spending growth of about 6.5 percent above last year. But strong corporate earnings, better-than-expected growth in certain sectors, and M&A activity are contributing to a sense of exuberance, especially in certain sectors. Both Gartner and IDC have recently raised predictions, for example, for PC shipment growth this year.

Now comes news that M&A deals continue to experience a torrid pace. For the first six months of the year, 1,930 deals worth about $347 billion were reported, according to The 451 Group. While the number of deals declined slightly from last year, the dollar value skyrocketed about 50 percent from last year, according to a 451 Group report. About half the deals involved acquisitions by public companies, and half involved private equity companies.

Also, the pace of M&A is accelerating, according to the report. After $95 billion in M&A deals in the first quarter, second-quarter M&A spending jumped to $252 billion.

IT is getting a lion’s share of M&A dollars. For example, in the first six months of the year, IT services deals amounted to about $94.7 billion, while software deals excluding storage and security companies amounted to $27.6 billion, according to 451 Group.

These days, M&A activity is being seen as a healthy sign. That was not always the case. “PE (private equity) used to buy broken companies,” noted 451 Group financial analyst Brenon Daly. But now there are various reasons why IT services and software companies are targets, he noted.

“It’s not a great time to be a public company,” Daly said. For example, there is a lot of scrutiny on companies being brought to bear by Sarbanes-Oxley rules, he noted. Thus, there are a lot of willing buyout targets, especially among smaller companies, he said.

IT services companies are popular targets because once the difficult sales cycle is accomplished, long-term contracts lock in revenue for a foreseeable period, Daly said. Software companies in mature markets may see new license revenue slowing down but have a solid business in maintenance revenue.

Though 451 does not track telecommunications deals specifically (telecom M&A is included in its total tally, however), recent telecom deals have also excited the market. For example, AT&T’s announcement Friday it would buy carrier Dobson Communications for about $2.8 billion helped lift the Nasdaq to its high level earlier this week.

M&A deals help boost IT investor interest in several ways, noted Daly. First of all, as companies are bought and taken off the market as targets, there are fewer companies to invest in, even as a liberal lending regime continues to stoke opportunity and interest. Also, M&A sparks a continual guessing game of Who’s Next? Excited investors essentially place bets on companies they think will be the next to be snapped up.

It’s not all smoke and mirrors, though. Several quarters of healthy corporate earnings have given a solid underpinning to investor interest in tech. The earnings-report season is getting underway in the next few weeks, and industry watchers will get a sense of how the next six months will play out.