The acquisition pace in 2018 is going to feel like a blizzard or, as we say in New England, a Nor’easter.
Although this past year was very active, it’s going to look like nothing happened when we make the comparison in December 2018. The pace is going to quicken for a number of reasons, all of which are coming together at once.
First off, it’s clear that private equity investors are becoming more interested in the high-tech solution provider market, where there is a large playing field of available deals. The best solution providers that have solid customer relationships and a growth strategy to drive more recurring revenue are highly sought after.
The recurring revenue helps drive a rollup strategy to get bigger through acquisitions and/or puts the company in a position to grow the percentage of profit coming from the recurring revenue side and flip the business a few years later.
The market also is in one of those cycles where bigger looks better despite the challenges that come with operating over a larger geographical market that has strong regional players. The real action in the M&A market, however, is more likely to happen on the vendor side where the technology is moving faster than ever and the floodgates may open soon, ushering in a great deal of cash that needs to go somewhere.
If the tax plan making its way through Washington, D.C., becomes reality, the cash that is being held overseas because of the repatriation tax will rush back to the U.S. The most recent data I’ve seen puts the cash hoard being held at more than $2.5 trillion. In the case of Microsoft and Apple, they alone each has more than $100 billion sitting overseas.
Cisco CEO Chuck Robbins noted recently that should the changes in the tax plan hold and the cash be allowed to come home at a reasonable rate, the company will quicken its acquisition pace. Robbins also said Cisco would be among the top five companies benefiting from a reduction in the repatriation tax and he would expect to not only use it to acquire companies, but also to invest in innovation and return a portion to shareholders. Cisco, which has always been particularly good at finding, acquiring and incorporating acquisition targets, will be in a particularly strong position.
But Apple, Cisco and Microsoft are not the only ones sitting on billions they would like to use. HPE, Dell, Oracle and virtually every other high-tech multinational would be in the same position.
What I think we can expect to be different, however, is that with the cash available, the likelihood of bigger deals on the order of Dell’s acquisition of EMC will be high. We are very likely to see some really big brands be both hunters and hunted.
As we exit 2018, it’s going to be more difficult to call any of the big brands a software or a hardware company. My bet is the traditional hardware companies like HPE, Dell and Cisco will have used the available cash to become stronger in software. Each of them understands the need to have the wide swath of products, services and software in the market, and they are not going to be shy about executing.
So get ready for a wild ride where solution providers become bigger and more important, tech suppliers become more innovative and acquisitive, and the entire industry gets reshaped in ways we have never seen before. It’s what makes high-tech so much fun to be a part of and why it ultimately impacts every industry on the planet.
BACKTALK: Make something happen. Robert Faletra is CEO of The Channel Company. You can contact him via email at firstname.lastname@example.org.