Tech Selloff Makes Upstarts Tempting
Date : 01/22/2016 @ 3:03AM
Source : Dow Jones News
Stock : Box Class A (BOX)
Quote : 10.58 0.21 (2.03%) @ 1:08PM
Tech Selloff Makes Upstarts Tempting
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(FROM THE WALL STREET JOURNAL 1/22/16)
By Robert McMillan
The recent market selloff is pummeling the business-technology sector, but it may come with a silver lining for its top players: an opportunity to buy cash-poor upstarts that have been eating away at their business.
Enterprise-technology giants like International Business Machines Corp., Cisco Systems Inc., Hewlett Packard Enterprise Co. have all seen their market value shrink by at least 9% in the past month -- underperforming the S&P 500 index, which fell 7% over the same period.
Some younger firms have fared much worse. Box Inc., a seller of Internet-based data storage, has dropped by 26%. Workday Inc., which sells online access to accounting and human resources software, lost 13%. The market capitalization of Hortonworks, which makes data-analytics software, has plummeted by half.
Enterprise-technology companies provide the infrastructure that powers the global digital economy. They make the computing hardware that stores and processes business information. And they supply the software that can unite tens of thousands of Internet-based servers into a corporate supercomputer, crunching terabytes of data to find hidden patterns and insights.
The business-technology industry's biggest players have been struggling to adjust to broader changes like the shift from on-premises data centers to cloud computing delivered over the Internet.
Buying smaller, cash-poor public companies -- which the recent selloff has made much cheaper -- could help them deliver new-breed products and services. Shares of privately held ventures are being discounted too, creating manifold opportunity for cash-rich incumbents.
With nearly $60 billion on hand, Cisco is in an especially strong position to make acquisitions. IBM and HP Enterprise have $7.7 billion and $10.1 billion in cash respectively, but they are also already carrying much higher debt loads.
On Thursday, IBM said it paid $130 million for Ustream Inc., a seller of video-streaming services, in a bid to expand its portfolio of cloud-based computing offerings.
"We now expect to see a period where some of the bigger IT players are more aggressive in acquiring," said Chris Bulger, the managing partner of Bulger Partners LLC, a Boston-based firm that provides strategic advice for acquisitions.
Dell Inc. touched off a thirst for mergers late last year with its $67 billion bid for EMC Corp., the biggest tech deal in history. Now other companies are shopping around. HP Enterprise CEO Meg Whitman has made it clear that acquisitions are key to her company's growth.
"Even before this correction, we've already been seeing the large-cap incumbent technology companies buy small fast-growing cloud companies because they need that kind of DNA, they need that kind of growth," said Aaron Levie, the CEO of Box -- which helped champion the shift to cloud computing -- in an interview. "If it gets a little bit more pronounced because of that climate, I would totally not be surprised."
Box may make an attractive acquisition to a company such as SAP SE, which also offers business software over the Internet, said Matt McIlwain, managing director with Madrona Venture Group, a Seattle-based venture-capital firm. SAP didn't respond to requests for comment. In an emailed statement, Mr. Levie said Box was well positioned to drive long-term growth "as an independent company."
Mr. McIlwain believes that Palo Alto Networks Inc., a network-security company that went public in 2012, could be an acquisition target for Cisco, which makes network hardware. Shares of Palo Alto Networks are down 21% over the past month. Cisco and Palo Alto Networks declined to comment.
Meanwhile, startups that had been looking to go public may now have to wait. The initial-public-offering climate, already cool to technology companies, has become bleaker in recent months as tech valuations have slid. Between March and September, the last period for which data is available, money-management firm BlackRock Inc. revised the estimated value of online storage provider Dropbox Inc.'s shares by 32%. During the same period, Hartford Financial Services Group Inc. lowered its estimates for the mobile-security firm Lookout Inc. by 22%.
Flagging stock prices aren't the only symptom of global economic anxiety hurting enterprise-technology companies. The market gyrations come on top of the strong U.S. dollar, which has driven up the prices and lowered sales for U.S. products in international markets. That already has taken a large bite out of corporate revenue. On Tuesday, IBM warned that currency headwinds will hit profits in 2016 to the tune of $1.3 billion.
Three years ago, market-research firm Gartner predicted that global corporate spending on hardware and software would hit $4.1 trillion in 2016. Today that estimate stands at $3.5 trillion, reflecting an anemic projected annual growth rate of 0.6%. Gartner says the strong U.S. dollar has made technology too expensive for buyers outside the U.S.
"The U.S. dollar's rise took $217 billion out of IT spending last year. That's a bigger drop than the 2009 financial crisis," said John Lovelock, Gartner's chief forecaster. "It's the biggest reduction in IT spending that Gartner has ever forecast."
(END) Dow Jones Newswires
January 22, 2016 02:48 ET (07:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
