One of the business stories that captured my attention last week was the merger battle over 3Par between Dell and HP. In the end HP won the battle with a whopping bid of $33 per share. A lot of people were astounded by the multiple HP paid for 3Par, which ended up being about 325x earnings, as it reminded them of the bubble years.
Throughout the duration of the Dell-HP merger battle, I followed the action on many different sites for two reasons:
- My love for mergers and acquisitions in general
- My desire to understand the logic behind this wild bidding war
One piece of commentary that really caught my attention was this video on BNN, where Ben Rogoff, senior portfolio manager with Polar Capital Partners in the UK, weighs in with his thoughts on the deal.
His analysis of the deal was very insightful for a number of reasons. First of all, he made the point that the actual price being paid for the 3Par could not be compared to typical deals, as the company carried a high level of strategic importance to both companies. That is why the bidding got so crazy. Secondly, he made some very interesting remarks about the overall trend in the technology industry, particularly that he believes that we are at the beginning of a new cycle in technology.
What he means by a cycle is something similar to what we saw in the 2000 era during the dot-com bubble. During this period of time, technology companies were red hot and as we saw, their valuations got way out of control. This cycle that we are entering, however, would be completely different and much more sustainable for numerous reasons:
- The search by large cap companies for areas of growth. The global downturn has caused growth to be stagnant in Western markets, especially North America; therefore, strategic acquisitions become essential for large companies who are looking to grow. Rogoff notes that “my sense is that there are a number of mid cap companies that need to be acquired in the next two or three years.”
- Investors will be much more likely to back lucrative growth opportunities in small and mid cap companies than large cap companies with limited growth prospects. According to Rogoff “value will continue to move from large companies and their shareholders to small and mid-size companies and their shareholders.”
- Many of the most prominent technology companies, Apple, Google, Cisco, etc. have large cash positions. Rogoff adds that “large cap companies are feeling like their cash is burning a hole in their pocket; it’s clearly not earning a return in the bank.”
These three trends alone are enough to support high valuations for strategically relevant companies. If the 3Par acquisition is a sign of things to come, then there may indeed be a whole new wave of companies that become hot commodities for the big players. If this is the case, then we could be at the beginning of a new cycle in technology. I don’t know what a new cycle would amount to, but it seems to me that there is no better time than today to be starting a technology company.
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