LinkedIn deal may spur more large-cap software, Internet M&As

NEW YORK — Big Internet and software deals are rare. That may change in 2016.

Microsoft’s US$26.2 billion (S$35.35 billion) deal for LinkedIn could trigger other large-cap M&A for business software and Internet companies.

NetSuite and Ultimate Software Group could both be targeted by companies including SAP SE, IBM and Oracle that want to strengthen their cloud-computing assets, according to Mr Mandeep Singh, an analyst at Bloomberg Intelligence. Twitter also has at least a 15 per cent chance of seeking “strategic” M&A in the next 12 months, Goldman Sachs Group analysts wrote in a note to clients.

The Microsoft-LinkedIn deal “could potentially create a greater sense of urgency than there was before for acquisitions”, said Mr James Cakmak, an analyst at Monness Crespi Hardt & Co. “If the perception is that there is an appetite out there and there’s a willingness to make moves, then that could help create urgency and help pick up the pace.”

Internet or software deals of more than US$8 billion have been once-a-year occurrences in recent years. Facebook agreed to buy WhatsApp in 2014 for US$19 billion.

Last year, Dell agreed to acquire EMC for US$67 billion, the largest tech deal of all time. In a smaller transaction, Symantec on Sunday unveiled plans to acquire Blue Coat Systems for about US$4.65 billion.

A slew of enterprise software deals in recent months, both by companies and private equity firms, may push boards and executives to approve transactions to keep pace with competitors and buy assets while they are still available, said Mr Pat Walravens, an analyst at JMP Securities in San Francisco.

BILLIONS IN CASH

The big tech companies have the cash to make these purchases, too. Between the likes of Apple, Alphabet, Microsoft, Facebook and Cisco Systems, they have hundreds of billions of dollars in cash on top of the ability to issue debt and equity that could be used towards deal-making, said Mr Ivan Feinseth, chief investment officer at Tigress Financial Partners.

“Almost everybody’s in play and nobody’s out of reach because of the amount of capital that’s on balance sheets,” he said. “I’m surprised there have not been more deals.”

With premiums, any deals for NetSuite and Ultimate Software could approach or top US$8 billion, said Mr Singh. The median multiple for acquisitions for pure-play cloud companies is about seven times to eight times enterprise value over sales.

Salesforce.com, though, agreed to pay more than 10 times sales for Demandware in a deal announced earlier this month.

Founded in 1998, NetSuite, with a market capitalisation of US$6.34 billion, sells cloud business software including customer relationship management and e-commerce tools.

In May, the company unveiled software that unifies various accounting functions — for instance, billing, revenue recognition, orders and subscriptions — into one system. NetSuite has more than 30,000 customers, the bulk of which are small and mid-sized companies.

As of March of this year, Oracle co-founder Larry Ellison and his family own about 45.4 per cent of NetSuite’s common stock, according to a company filing. Mr Ellison has “control over approval of significant corporate transactions”, according to the filing. NetSuite also warns in the document that Mr Ellison’s stake could “discourage potential acquirers”.

Ultimate Software sells Internet-based software that help businesses manage human resources and payroll. The company has almost 4 per cent of the human capital management software market, coming in as the sixth-largest provider of these tools, according to Mr Singh.

Twitter, the social-media service that lets people communicate in 140-character messages, has struggled in recent years with slowing user growth, fuelling concerns that it will not be able to expand past a core constituency of journalists, celebrities and politicians to reach a wider general audience.

New participants complain that the product is hard to understand and use. CEO Jack Dorsey has been trying to widen Twitter’s appeal by making it more intuitive.

These initiatives have yet to pay real dividends, and investors and analysts have questioned Twitter’s ability to attract advertising dollars as a result. Some of those fears were justified when the company reported first-quarter revenue that missed estimates. Mr Dorsey, whose attention is split as the head of payments company Square, has also been dealing with executive departures and laid off about 8 per cent of the workforce to rein in bloated product and engineering groups.

Twitter’s troubles have weighed on the stock, which has lost more than half its value over the last year. The sharp drop in price has incited speculation that Twitter is now cheap enough as a takeover target for larger companies interested in adding a social platform.

Twitter has a market capitalisation of US$10.2 billion. The Microsoft-LinkedIn deal can be seen as a proxy for the value placed on technology assets that consume people’s time and that provide the data and analytics around usage, said Mr Cakmak. BLOOMBERG