Why Big Tech Is Paying Superlative Premiums for Growth

Big Tech Is Paying Superlative PremiumsIn June when Microsoft Corporation (NASDAQ:MSFT) decided to pay a 50% premium to acquire LinkedIn Corp (NYSE:LNKD) in a $26.2-billion deal, the market decided that MSFT overpaid. I was on the opposite side of the fence, believing it was a good and necessary move for Microsoft to expand into more lucrative growth areas. Since then, Microsoft has vaulted from below $50.00 to a record high last week.

What we are seeing in the technology space is a shift in thinking. Big technology companies that have lots of cash but are facing muted growth are looking to add growth with a current focus on cloud plays.

MSFT stock added LNKD stock, which is expected to grow Microsoft’s revenue 24.4% in 2016 and 19.6% in 2017. Strategic moves like this are critical for the large-cap technology companies to grow. MSFT stock is expected to grow two percent in 2016 and 62% in 2017, but the addition of LNKD should help to push the growth rates and drive a higher multiple.

Oracle Corporation (NYSE:ORCL) was the most recent big tech company to add growth after announcing it would pay a 62% premium, or $9.3 billion, to acquire cloud play NetSuite Inc (NYSE:N), a developer of business software that runs on the NetSuite cloud. Oracle currently sells business software that runs on clients’ own networks, so the addition of NetSuite could mean a change in strategy for ORCL stock.

Oracle Corporation NYSE Chart

Chart courtesy of www.StockCharts.com

For ORCL stock, the deal makes sense, as it adds much-needed growth to a company that is expected to grow a mere 2.4% this year and 2.8% in 2017.

By comparison, NetSuite is expected to grow its revenue by 30.4% this year followed by 26.6% in 2017.

Why IBM May Need Salesforce

The market move to cloud will pick up steam, as companies decide it could be more beneficial and cost-effective to have their information in the cloud rather than on their own networks. Microsoft and Oracle obviously see this.

Former tech heavyweight International Business Machines Corporation (NYSE:IBM) is also trying to expand its cloud offering, which makes sense given its business. The problem with IBM is its dismal growth prospects, with revenue expected to fall 2.6% this year and another 0.6% in 2017.

International Business Machines Corporation NYSE Chart

Chart courtesy of www.StockCharts.com

IBM needs growth, so perhaps it wouldn’t be a stretch to envision the company taking a run at salesforce.com, inc. (NYSE:CRM), a provider of cloud solutions catering to customer relationship management. Microsoft had previously looked at buying CRM stock.

salesforce.com, inc. NYSE Chart

Chart courtesy of www.StockCharts.com

For IBM, salesforce.com would be a major deal that could run it more than $75.0 billion, assuming a 50% premium. CRM stock is expected to grow revenue at 24.6% and 21.6%, respectively, in 2016 and 2017, so it would definitely add to IBM’s growth.