Seeking Alpha

4 Strategically Smart Technology Mergers

by: Kevin Berk
Kevin Berk
Strategic growth investing, long/short equity, special situations

Google's purchase of Motorola Mobility (NYSE:MMI) had an electricifying effect on tech stocks. The market expects more acquisitions because cash piles at the major technology companies are enormous and growing rapidly. While I would recommend that most of the majors boost their dividends and some companies increase buybacks, they should all be trying to solidify their strategic positions. Given the relatively low valuations of the majors and high cash balances, all these mergers should be done with cash [except Amazon (NASDAQ:AMZN) - use that inflated stock!] However, many acquisitions don't make strategic sense [Cisco (NASDAQ:CSCO) buying Flip?!?]. Here are four potential merger pairs that make strategic sense to me. I have no inside information about any of these - they are pure speculation.

Oracle (NYSE:ORCL) should buy Dell (DELL-OLD). Sure, while this would amount to a tripling down on the hardware space, but it would give them the scale to more effectively compete for corporate clients for integrated deals. Dell is cheap, is growing again and has lots of cash. Given Dell's ongoing strength in the enterprise and governments, Dell is the PC maker with the best overlap with Oracle and has a strong presence in Data Centers as well. Dell's stock has been beaten up as the iPad and Macbook Air have sucked a lot of the sales and profitability out of the consumer laptop market. In Dell's case, they are more insulated as a lot of their profit comes from corporate sales. As a small plus, it might give ORCL's fledging consumer software products a fighting chance (OpenOffice preinstalled?).

Apple (NASDAQ:AAPL) should buy Adobe (NASDAQ:ADBE). Given how much Apple has publicly beaten up Adobe over software bugs and being proprietary, this would require a big change of heart on the part of Steve Jobs. However, he could easily spin the story: "Apple provided a roadmap to the future and Adobe listened. Over the past couple of years, Adobe's products have gotten better. Once Adobe is part of Apple, we will open up Flash and make it world class." Overall, the merger makes sense - Adobe market leading creative products are very much within the core Mac customer base. Snagging Flash and Acrobat would further entrench Apple's software into everyone's daily lives - more opportunities to bundle Safari, Quicktime and iTunes. Lastly, Adobe has only been this inexpensive once - during the financial crisis. Apple could do this deal with pocket change.

Amazon should buy Sirius (NASDAQ:SIRI). If Amazon is serious (pun intended) about competing with Netflix (NASDAQ:NFLX) in video and Apple in music then securing exclusive and differentiated content becomes imperative. Sirius could fill a subscription gap in music for Amazon, in addition to providing a simple way to drive sales of MP3s. The deal will also increase Amazon's leverage over the music industry. While the music labels are weakened, they are still the primary gatekeepers for music innovation. Apple is one of the only companies able to corral all the major labels to launch new products. AMZN/SIRI might provide the music industry with a true competitor to play against Apple. In addition, by bundling Sirius with Prime Instant Video, Amazon can create a differentiated product from Netflix that will attract customers. Right now, the Prime offering is just a subset of Netflix. Sirius is pricey but Amazon's stock is arguably even more so! AMZN should buy SIRI for stock. Amazon should also be in the hunt for Hulu.

Microsoft (NASDAQ:MSFT) should buy Intuit (NASDAQ:INTU). This hypothetical merger has been discussed for over 20 years for a reason. It makes sense. Now more than ever. 20 years ago, Microsoft launched Microsoft Money to best the consumer oriented Quicken. In 2009, Microsoft discontinued Money. In the meantime, both companies have become quite strong in the SMB software space. Microsoft even bought Great Plains to compete with Quickbooks. Intuit is winning. Again. Quickbooks is a strategic point of control in the small business market. Once a company has Quickbooks installed - the upsells to payroll, credit card processing, etc. are easy - Intuit just pitches how easy the integration is! Microsoft is looking for billion dollar markets - well, Intuit will cement their presence within administrative functions of small to medium businesses. Unfortunately, Intuit is not particularly cheap right now. In addition, there would be more regulatory scrutiny on this deal than any of the others. Alas, we may have to wait another 20 years for this one!

Disclosure: I am long DELL, MSFT, AAPL.