Tech poised to be a hot sector for M&A in 2011

With two multibillion-dollar deals already announced in the first quarter, the technology sector may be positioned for another strong year of mergers and acquisitions.

Big deals

Mergers and acquisitions have been multiplying in the technology sector for the past 18 months. In the first quarter of 2011, the value of deals reached $27 billion, representing a 124% increase over the first quarter of 2010, according to Ernst & Young. Technology ranked first among 10 industry sectors in the number of deals, which totaled 1,375 for the quarter, as reported by Dealogic. This amount more than doubled the totals seen in seven other sectors.

Market motives

Large firms are leading the way as companies seek to enhance their capabilities with new technology and try to jump-start growth. For many larger, older tech companies, the motivation for acquisitions is to turn around a slowdown in growth. Some companies are specifically seeking opportunities in next-generation technologies such as cloud computing. The cloud is a virtual platform that allows users to access many applications without requiring a dedicated server.

Two of the biggest deals announced this year include Microsoft’s plan to acquire Internet phone service provider Skype for $8.5 billion and Texas Instruments’ deal to buy National Semiconductor for $6.5 billion. Microsoft’s aim is to expand into next-generation technology, by allowing Microsoft to integrate Internet phone and video service capabilities into its offerings. However, ultimately the acquisition may be less about the technology and more about gaining Skype’s significant customer base.

The Texas Instruments deal, on the other hand, is clearly not about new technology. Instead, the acquisition of National Semiconductor will position the firm as a leader in the semiconductor market, and allow it to gain market share. [As of March 31, 2011, Microsoft represented 6.11% of Putnam Global Technology Fund and Texas Instruments made up 0.19% of the fund. Skype and National Semiconductor were not held by the fund as of March 31, 2011.]

International trends

The M&A trend may also pick up steam internationally. Large technology companies, which tend to have very healthy balance sheets, typically have global operations and a significant amount of cash overseas. Lately, some tech companies have joined with pharmaceutical and energy companies to lobby for a temporary federal tax holiday in an effort to bring back some of their overseas earnings and put them to work in the United States. Without tax incentives from the federal government, they would face a 35% tax rate. If the effort is unsuccessful, we may see some of that cash used for international acquisitions.

This article on technology investing can also be found at putnam.com/insights.

Any Putnam funds referenced in the above articles are offered only within the United States or to U.S. citizens.

The views and opinions expressed are those of the fund manager above, are subject to change with market conditions, and are not meant as investment advice.

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