The Next Tech Buyout Wall Street Doesn't See Coming

2015 has been a banner year for M&A. Here are three potential technology buyouts.

Alex Dumortier
Alex Dumortier, CFA, Tim Beyers, and Andrew Tonner
Nov 3, 2015 at 4:00PM
Technology and Telecom

2015 is on track to surpass 2007 as the biggest year in terms of mergers and acquisitions activity worldwide. That's true for the U.S., too, and the technology sector has played its part. Just last month, Dell announced it was acquiring EMC Corporation in a deal it valued at $67 billion -- the largest technology deal ever. While we wouldn't recommend buying a company's shares in the expectation that it will be acquired, it's interesting to think about which companies are likely acquisition targets. We asked three of our analysts to identify the next tech buyout that Wall Street doesn't seem coming.

Image source. Republished under CC BY-ND 2.0.

Alex Dumortier (Square): The words "payments processing" don't exactly set one's pulse racing, but how does "mobile payments" strike you instead? With the substitution of a single word, we are transported to a San Francisco coffee shop -- we're now in the realm of Apple Pay, PayPal Holdings (NASDAQ:PYPL), even Facebook...and privately held payments start-up Square.

The payments sector is extremely active right now, as established players and new entrants scramble to position themselves for rapid change in the marketplace:

  • At the start of July, PayPal acquired "digital money transfer provider" Xoom in a deal valued at $890 million. PayPal announced the transaction just five days prior to its own high-profile initial public offering.
  • On Sept. 18, the private equity owners of U.K. payments services business Worldpay turned down a 6.6 billion pound ($10.1 billion) offer from France's Ingenico. Instead, they floated the company in mid-October in the biggest U.K. IPO in two years. The offering has been well received: On Monday, the shares closed 19% above the 240 pence IPO price.
  • Two days after Worldpay's IPO, KKR & Co. L.P. took First Data Corporation public in the largest U.S. IPO this year. The offering was less successful, however: On Monday, the shares closed $0.02 below the $16 offering price.

This brings us to payments start-up Square, which will reportedly float its shares the week before Thanksgiving, with an indicative price range to be set this week.

The company is unprofitable, but it has already attracted plenty of buzz. Square is well known in the technology industry, in part because of its lineage: It was co-founded and is currently headed by Jack Dorsey.

While Wall Street banks may be focused on obtaining the mandate to run Square's IPO (who can blame them?), I wouldn't be surprised to see a "PayPal scenario" play out. In July 2002, eBay announced it was acquiring the online payments company less than five months after it had gone public.

Andrew Tonner (Qlik Technologies): Cloud computing is about as hot a market as there is in tech these days, and that's why I believe business intelligence (BI) software vendor Qlik Technologies Inc (NASDAQ:QLIK) could make for an appealing acquisition target for a larger enterprise tech player looking to buy its way into this booming market.

Qlik Technologies sells software that allows companies to analyze and organize key data for their businesses in order to drive more effective decision-making for companies large and small. Trading at a market capitalization of $2.9 billion, Qlik Technologies is the smallest of its peers discussed here, which could make it easily digestible for big tech names.

Each of these larger enterprise IT companies has expressed interest in tapping into the budding BI software sector, which analysts believe could be worth $60 billion over the next three years. Especially since the BI software market enjoys roughly 10% market penetration today, a buyout of a smaller BI-specific vendor could enable one of the above enterprise IT giants to quickly and aggressively compete for market share, and that certainly makes Qlik Technologies and its peers smaller tech buyout potentials that investors would do well to watch out for in the coming quarters.

Tim Beyers (Cisco acquiring Infinera): The Internet isn't nearly as fast as it needs to be. No one knows this better than Cisco Systems (NASDAQ:CSCO), which regularly tracks the volume and velocity of growth in data flowing to and through the vast infrastructure that powers the web.

You can see the company's many accurate forecasts at its Visual Networking Index (VNI). Its best call dates from 2010, when the company forecast 34% annual growth in Internet Protocol traffic from 2009 to 2014. Cisco's tracking has since put the actual at 35.6%. That alone should be enough to get investors paying attention when company researchers say that, come 2019, global IP traffic will reach 168 exabytes per month -- the equivalent of transporting 58 million DVDs each hour.

Can you imagine today's Internet infrastructure handling that when a database error can cripple even the most powerful cloud infrastructure, taking with it significant portions of the consumer web? I can't either, which is why I'd expect Cisco to bid for the technology needed to update the backbone of the Internet. Infinera Corp. (NASDAQ:INFN) has a good chunk of it, and it's priced within reach at a market value of $2.8 billion as of this writing.

That may not last long, though; demand is soaring. Revenue climbed 33.9%, and cash from operations rose 45.7% year over year in the third quarter as customers paid up for Infinera gear that delivers data at 100 gigabits per second over long distances, uniting metropolitan areas and beefing up carrier networks.

That's just the sort of technology Cisco needs to handle the data tsunami that its own tracking says is coming in 2019. Expect a bid for Infinera well before the first wave hits.