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Megacap tech firms with $600bn of cash could drive wave of deal-making

Experts believe conditions are right for number of high-value deals to occur this year

A whopping $600 billion (€525 billion) of cash stashed at Wall Street's megacap technology companies could drive a wave of deal-making in the sector after the valuations of once high-flying names such as Peloton Interactive Inc and Netflix Inc slumped. Amazon. com Inc has been speaking to advisers about a potential deal for Peloton, the Wall Street Journal reported recently.

The ecommerce giant had $96 billion (€84 billion) in cash and marketable securities as of December 31st – more than nine times Peloton's market value, even after the stock surged as much as 31 per cent on Monday. While the risk of regulatory scrutiny may deter some buyers, plenty of other companies are loaded with cash too. Apple Inc tops the list with $202.6 billion (€177.2 billion), more than the capitalisations of Netflix, Qualcomm Inc or Intel Corp.

“Having a lot of cash on hand creates flexibility for these companies in challenging economic environments; they can put cash to work, make acquisitions,” said Carlos Garcia-Tunon, senior managing director and head of fundamental equity at MacKay Shields. “I wouldn’t be surprised if we saw a pickup in deal activity in this environment.”


Would-be buyers may be more comfortable doing deals now that valuations have pulled back, he said. Netflix, for example, trades at the lowest valuation in almost 10 years at 34 times forward earnings and PayPal Holdings Inc’s has slumped to March 2020 levels. Tech stocks have declined as investors price in more-aggressive interest rate increases from the Federal Reserve.

Deal-making in technology is already off to a flying start this year: Microsoft Corp's planned $69 billion (€60 billion) takeover of Activision Blizzard Inc and Citrix Systems Inc's $13 billion (€11.3 billion) sale to a private equity consortium marked January as one of the busiest-ever months for mergers and acquisitions in the industry.

“M&A waves are hard to forecast, but the conditions do seem in place for acquisitions,” said Matt Peron, director of research at Janus Henderson. “You have companies that need to grow, and M&A is a big part of their strategy.”

But billions of dollars at hand alone doesn’t help in deal-making. US antitrust enforcers are looking to toughen merger reviews, saying a new framework is needed to combat a surge in deals that threatens to worsen already high concentration across industries, especially tech.

Speculation that megacaps should buy Peloton or other beaten-down stocks after their shares crash sounds “silly”, given how strict antitrust regulators are shaping up to be, said David Barse, chief executive officer at XOUT Capital.

“Doing buybacks or issuing dividends are the only option as there’s only so much they can spend on research and development,” he said.

– Bloomberg