February 2, 2017
![Companies Anticipate Big Software Deals, With Help From Trump Companies Anticipate Big Software Deals, With Help From Trump](https://eu-images.contentstack.com/v3/assets/blt8eb3cdfc1fce5194/blt0b4d137e53c4a799/66211c5c6f01bb4b21ff1f9e/Meg-Whitman-HP-Marc-Benioff-Salesforce-getty.jpg?width=1280&auto=webp&quality=95&format=jpg&disable=upscale)
By Brian Womack (Bloomberg) -- The software industry went on a shopping spree in 2016, and this year could be even busier, bolstered by the new president’s policies and what one analyst suggests could be a major deal by Google.
The value of software deals in 2016 topped $115 billion for acquisitions closed or pending, according to data gathered by Bloomberg. That’s up about 19 percent from 2015 and easily outpaced the growth of deals in the overall technology market, which was slightly down. And this year is already off to a strong start with Cisco Systems Inc. agreeing to acquire AppDynamics Inc. for $3.7 billion right as the company was planning to go public.
Oracle Corp. and Salesforce.com Inc. were among the bigger buyers in 2016, but this year companies that have been relatively quiet may step up, analysts say. They could include other important names in enterprise technology -- and potentially some of the biggest players in the broader industry: Google and Amazon.com Inc. The new Trump administration has talked about rewriting tax provisions that could return profits stored away in other countries, which would fuel the size and frequency of deals. And while blockbuster deals can be difficult to pull off, some see the potential for Google pursuing Salesforce.
"There’s no question that’s it going to be an active year," said Crawford Del Prete, an analyst at IDC. "The stakes are just so high for these software companies to make sure that they stay relevant."
Arete Research Services LLP, an influential research firm, issued a report arguing why Google parent Alphabet Inc. should make a big merger splash and buy Salesforce. The note says Google could nab it for around $73 billion, immediately giving its cloud business surer footing in enterprise sales. Such a deal would also have a better chance of passing regulatory muster than one in ads or search, according to the Arete analysts.
It’s a radical proposal, but not implausible. Google is pouring nearly everything it has into the cloud. Since recruiting enterprise veteran Diane Greene in late 2015, Google has invested internal resources and acquisition coffers in her division, which includes its customized workplace apps and cloud storage service. Google and Salesforce both declined to comment.
But not everyone thinks it’s a certainty. "I wouldn’t think this is particularly likely," said Jonathan Atkin, managing director of RBC Capital Markets. "But this is a way to jump-start their momentum they have in their cloud product. It’s an acquisition of a customer base, effectively."
Amazon is also trying to grow its cloud business. It’s the largest player in the so-called public cloud, which lets customers easily rent computing and storage power at their data centers. Amazon declined to comment on potential acquisitions.
"I think you’re going to start seeing them being more aggressive in 2017," said Sean Jacobsohn, a venture investor at Norwest Venture Partners.
A potential change in tax laws could free up more spending money for a lot of players. U.S. companies have earned profits overseas for years, but have tucked them away in foreign countries to escape a U.S. tax rate of 35 percent. As long as the profits remain overseas, they remain untouched by the government.
Yet Trump’s nominee for the U.S. Department of Treasury, Steve Mnuchin, may give companies a new incentive. He said in November he wanted to bring “a lot of cash back to the U.S.,” proposing a one-time 10 percent repatriation tax to return corporate tax revenue held abroad, another key promise by Trump.
"I expect that ’17 will be another big year in M&A, particularly if we get repatriation or a tax cut," said Joel Fishbein, an analyst at BTIG. "I think that will spur more M&A as some of those offshore dollars can be used for domestic acquisitions."
There is a lot of corporate money overseas that could come back inside the country if Trump acts on taxes. Oracle and Microsoft have more than 80 percent of their cash, near-term cash and short-term investments in foreign subsidiaries, according to recent filings. The cash overseas held by large tech companies runs into the hundreds of billions of dollars, according to Ross MacMillan, an analyst with RBC, and that’s money companies may use to go shopping. Oracle and Microsoft declined to comment.
Overall in 2016, the value of merger-and-acquisition business software deals totaled $117.6 billion-- and included a wide swath of software companies in technology sectors, along with some in health care and entertainment. That doesn’t include the blockbuster tech deal of the year: Microsoft paying $26 billion for LinkedIn. LinkedIn does not fit neatly into the category of business software because of its professional networking tools that are used by workers outside of business hours.
Even without repatriation, companies are sitting on a lot of cash that can be used to finance deals. Cisco -- which has about $70 billion in cash and equivalents and investments overall -- saw opportunity to expand its business-software capabilities with the deal for AppDynamics, which had previously been valued at more than $1 billion, making it a so-called unicorn. It’s the biggest software acquisition for the company since 2012.
The purchase is also significant because it derailed the first potential IPO of the year for a U.S. tech company. Now it’s seen by some advisers as the first in a long-expected wave of unicorn buyouts. With more than 150 companies valued at more than $1 billion and a temperamental IPO market, being acquired offers startups an exit from the funding roller coaster and can also shield them from the regulatory and investor scrutiny that comes with a public listing.
"IPO investors still aren’t paying premiums, so M&A looks like an attractive option to private companies," according to Dan Scholnick, a general partner at Trinity Ventures. Unless IPO investors are willing "to pay up, the M&A trend will continue."
International Business Machines Corp., which recently reported its 19th consecutive quarter of sales decline, could gobble up smaller companies to reinvigorate growth as well. IBM declined to comment. SAP SE, a rival to Oracle and Salesforce, might also be on the hunt for cloud acquisition targets, analysts say. Its last big multibillion-deal came in 2014 when it spent more than $7 billion on Concur Technologies, which helps businesses manage travel expenses. Still, SAP, which declined to comment on specific future targets, signaled it will look at acquisitions under $1 billion.
Still, there are several factors, analysts say, that could lead to a disappointing 2017 for deals. The Trump administration could fail to pass tax reform. And because 2016 was such a busy year, it may be difficult to keep up the pace; some of the acquirers will need time integrate their purchases. Some say that many of the interesting companies got picked up last year.
"You did see a lot of good assets come off the table," said Rodney Nelson, an analyst at Morningstar.
Not everything, though. Analysts say two big potential targets for companies looking to expand their cloud services are Workday Inc., a provider of human resources software, and ServiceNow, which helps companies manage technology and human resources tools. Both are relatively large with a valuation of about $15 billion. Both companies declined to comment.
Other companies that might look like good buys include FireEye Inc., a security company; Hubspot Inc., a cloud-based marketing service; and Zendesk Inc., which serves call centers, according to Brad Reback, an analyst at Stifel Nicolaus & Co.
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