The world’s technology giants are sitting on an unprecedented mountain of cash. And with Microsoft embarking on one of the largest technology acquisitions in history, there’s new evidence that they’re willing to spend it.
Silicon Valley would love nothing more after two years with a moribund market for tech IPOs and, even counting Microsoft’s blockbuster deal for LinkedIn, just a slow trickle of large tech acquisitions.
“Everyone in the tech industry has been bemoaning the fact that the big technology companies have had big balance sheets and yet they’re not making the big buys they could be making,” says Alexander Taussig, a partner at Lightspeed Venture Partners. “Maybe this opens up the M&A flood gates.”
If so, then it would be good timing for tech investors looking for an exit. Valuations have been falling in recent months. Institutional investors are in some cases aggressively marking down their holdings in so-called unicorns, those companies with valuations exceeding $1 billion. Smaller startups are being forced to accept “downrounds,” securing new financing with terms that value their companies below prices set by earlier investors. And until Microsoft stepped in with its offer, LinkedIn’s shares were down about 50% from their height last year of $260 a share.
For those charged with corporate mergers and acquisitions, Silicon Valley is starting to look like a department store on the day after Christmas, offering bargains next to the stratospheric valuations seen in 2015.
Indeed, as public markets stay shut to new issues, and institutional investors shy away from pouring additional billions into late-stage financings, big, acquisitive technology companies are among the few options in sight for a large exit.
A small, but growing uptick in M&A over the last few months had been raising hopes. Marketo ($1.79 billion), and Blue Coat Systems ($4.65 billion) each sold for large sums, along with a raft of smaller companies. LinkedIn, which fetched $26.2 billion in cash from Microsoft—a 50% premium to its closing share price on June 10—is one of the strongest signal yet that big companies’ reluctance to open their wallets is easing.
“What this says is that no company is too big to be acquired,” says Tasso Roumeliotis, a former venture capitalist and founder of the mobile technology company Location Labs. “There are buyers out there even for $20 billion companies.”
There is one hitch. Much of the money held by tech sector giants remains stashed overseas to avoid taxes: $441 billion, or 87% of the cash held by the five tech firms with the largest cash piles, is held by foreign subsidiaries, as USA Today recently noted.
Repatriating that money to buy US companies, rather than keeping it overseas, will be expensive. Companies must pay the 35% corporate tax they’ve dodged if they want to buy US startups with foreign cash. (Had Skype, a Luxembourg-based company, been based in the US when Microsoft acquired it in 2011 for $8.5 billion, Microsoft would have been looking at a $5.5 billion tax bill on the deal, payable to the US government.)
But if bargains available in the tech sector keep improving, companies may find that’s a price they’re willing to pay.