Tech M&A is finally bouncing back. As operating margins exceed historic levels, leading Information Technology vendors are seeking avenues for growth and yield on their swelling stockpiles of cash.
With the Fed intent on keeping interest rates near zero for the foreseeable future, cash rich companies don't have many investment options. To this point, share repurchase programs have been prevalent. However, this doesn't address the issue of EPS growth, which is becoming a greater challenge with profits reaching all-time highs.
During the 2008-2009 downturn, a wave of consolidation focused on software vendors with large customer bases and reliable maintenance-revenue streams. At the time, Pipeline Data identified 30 potential targets in a special report for customers. Nearly half were acquired (Borland, Chordiant, Epicor, i2, Lawson, Logility, MSC Software, Novell, SumTotal, Unica, Vignette, and Vital Images).
Since that time a few more of our original picks have been bought out or entered M&A discussions (including CDC Software, Compuware, JDA Software, Pervasive Software, and Retalix). However, the pace of deal flow decelerated shortly after Oracle's (ORCL) acquisition of Sun Microsystems in early 2010.
Now, amid a disastrous Q3 downturn in its business, ORCL has become much more active, acquiring five vendors in five months (Nimbula, Acme Packet, Eloqua, DataRaker, and Instantis). Investors should take note. Oracle is among the world's most savvy acquirers. Its 2005 takeout of PeopleSoft was the first in a wave of financially-motivated deals focused on recurring revenue. Indeed, its subsequent acquisition of Siebel Systems and Hyperion inspired Pipeline Data's special report.
Oracle's earnings miss was followed by an equally disappointing earnings report from TIBCO (TIBX). The set up is all too familiar. When continued earnings growth becomes challenging, M&A is often the remedy. With ORCL back on the acquisition warpath, we believe that Wall Street is witnessing the start of a renewed wave of buyout activity.
Thus, we expect the other tech giants to begin accelerating their M&A activities. Accordingly, we believe the time has come for investors to reset their sights on attractive candidates. Among the remaining companies from our original report, a few are still executing well and/or generate the kind of free cash flow yield that larger vendors and Private Equity shops crave. These include QAD (QADA) and Redknee (OTC:RKNEF).
Redknee is a Canadian provider of software solutions that enable telecom customers to monetize more subscriber transactions, while personalizing the subscriber experience to meet to increasingly varied and dynamic set of market requirements. We were formulating a full report, but the shares have recently run - they have more then doubled since signing an agreement to acquire a Business Support Systems (BSS) business from Nokia Siemens Networks in December.
QAD is based in California, providing enterprise applications for global manufacturing companies. Its applications enable the efficient management resources and operations. They also enable secure and automated collaboration with customers, suppliers and partners. We recently completed an analysis of QADA which concluded that the shares are poised to rise by 50%.
In the weeks to come, we plan to identify a new set of vendors that are poised to rise on the basis of solid execution and free cash flow yield, setting the stage for possible acquisition. We expect those vendors to fuel the next wave of M&A which we believe has already begun.