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 Feature Industry Articles 
Tuesday, July 22 2014
Status of the High Technology Industry . . . A 2014 Update Characterized by Mergers & Acquisitions
By Dr. C. R. (Buzz) Canup, President, Canup & Associates, Inc.
This is the fourth annual article the author has written for Expansion Solutions magazine on the topic of the status of the High Technology Industry. If you have not read the other articles, I would encourage you to visit the archives and to do so. The previous articles are a compilation of observations, facts, current affairs and opinions on the transition of the high technology industry during one of the most tumulus periods of world history. The transformation from being one of the top industries in the world, and the one “everybody wanted,” to an industry that was shedding thousands of jobs and shuttering hundreds of plants globally was very steep.

None of the high tech companies avoided adverse impact from the world recession beginning in 2008. Nor were there any that avoided the significant shift of resources, assets, and talent around the globe. The ensuing turmoil in north Africa and the Middle East turned the Mediterranean Region from a target of growth to a region of avoidance.

Even China felt the impact of the global recession and turmoil as their Gross Domestic Product growth was cut nearly in half. Consumer confidence in the U.S. hit all-time lows, and it showed up in shops and stores across the nation in sharp declines in sales and profits.

The latter half of 2013 began to show promise and progress. The high tech industry was beginning to grow again, companies were rehiring, and total employment in the U.S. rebounded from a low of just over four million employed in high tech to nearly six million in the U.S. Profitability, while lower than seen in 2008 overall, was returning.
Downsizing and lean operations implemented by many high tech companies during the recession began paying off.

But there is another phenomenon that is surfacing within the high tech industry. High technology companies are focusing on mergers, acquisitions and divestitures to reshape their business strategy, gain assets and talent, and penetrate new growth markets. It is much easier and faster to buy into a growing market than it is to develop internal resources to compete with industry leaders. And evidently, many of the larger name-brand companies have the cash in-hand to pursue the opportunities. There are hundreds of mergers, acquisitions, and divestitures that have occurred over the recent past, but let’s focus on some of the larger ones within this article.

Ernst & Young released a report on November 22, 2013 titled "The EY Technology Capital Confidence Barometer." It presented the results of a survey conducted with 1,600 senior executives in 72 countries, including 181 executives from the technology sector. Three of their key findings were:  1) 68 percent of executives surveyed say the global economy is improving; 2) 77 percent expect Merger & Acquisition deal volumes to improve; and 3) 33 percent expect to pursue an acquisition compared with only 20 percent a year ago. These findings square very nicely with M&A activities globally in the high tech industry over the past 24 months.

By far the largest deal made during the last year was not a merger or an acquisition. It occurred on October 29, 2013 when Dell announced it had been privatized by Michael Dell (original founder and CEO) and Silver Lake Partners, the private equity arm of Silver Lake Management LLC. Silver Lake Partners focus on large cap technology companies. The Dell web site currently reports that the total transaction value was $24.9 billion. The site also states, “This transaction positions Dell to enter an exciting new chapter, continuing the execution of its long-term strategy and focusing on delivering best-in-class solutions to customers as a private enterprise. Under a new private ownership structure, Dell will be even more flexible and entrepreneurial, allowing it to do what it does best — to serve our customers with a single-minded purpose and drive the innovations that will help them achieve their goals.”

It will be interesting to benchmark and follow this transaction over the near term. Dell has always been known for its global domination in the computer hardware and associated paraphernalia markets. The Dell announcement implied, however, that the change would enable Dell to “shape the forces of cloud, big data, mobile, and security that are changing the way people live, businesses operate and the world works.”

This focus is consistent with the characteristics of the high technology market where hardware platforms are shrinking in size, value and profitability, and software markets are growing in importance, mobility, and profitability.

The second largest deal in the past few months was announced February 19, 2014. Facebook purchased WhatsApp for $19 billion. Who?  For how much?  If you haven’t heard of WhatsApp you have fallen behind the over 400 million users around the globe that know all about it.

WhatsApp is an application that enables one to use their smart phone to communicate with other users – via voice recording! The application uses existing capabilities within the smart phone to enable the users to communicate free. And the app is also free for the first year.

Most folks are familiar with the Facebook IPO that occurred on May 18, 2012. Opening price of the stock was $38/share. It fell precipitously after the opening bell. It took fourteen months following the initial offering before the stock regained its initial IPO value. Facebook closed on August 2, 2013 at $38.05. As of the time of this writing, their stock closed close to $62/share. The WhatsApp acquisition comes about one year following an earlier Facebook acquisition of Instagram for $1 billion. But Facebook was not finished with the purchase of WhatsApp and Instagram. The company announced on March 25, 2014 they were buying Oculus for $2 billion. Oculus was not even in existence a little over two years ago. They are a start-up company that created the Kickstarted Oculus Rift. The product is a virtual reality gaming device that is not even available for purchase yet. It fits around the head and eyes much like ski googles, but is much larger in size and contains an internal flat screen for viewing. Social networking and virtual reality wrapped into one platform?  Crazier products have been envisioned!

Another major acquisition (and subsequent merger) occurred on September 9, 2013 when Molex, Inc. announced it had agreed to be purchased by Koch Industries for $7.2 billion. An ironic feature of this acquisition is that Molex was publicly owned and Koch is privately held. Koch companies manufacture a wide variety of products, including transportation fuels, building and consumer products, electronic connectors, fibers, fertilizers, membrane filtration and pollution control equipment. They employ over 100,000 persons in over 60 countries worldwide. Molex has kept its name and operates as an independent subsidiary of Koch.

In somewhat of a reversal of an acquisition, Google and Lenovo announced on January 29, 2014 that Google will sell Motorola Mobility to Lenovo for $2.91 billion. But wait a minute!  Didn’t Google just buy Motorola Mobility less than two years ago for $12.9 billion?  Yes, but Google is not taking as big a hit as it would appear on the surface. They sold the Motorola Mobility Home Division, including the cable box division, to Arris Group in December 2012 for $2.5 billion.

And, they are retaining the vast majority of the 17,000 patents they acquired with the purchase of Motorola Mobility.  The transaction also provided for Google to receive a stock ownership stake in Arris valued at 16 percent.

Other notable deals beyond WhatsApp and Motorola you may or may not be aware of that were announced in the first quarter of 2014:

• Google announced it is buying Nest Labs for $3.2 billion. Nest Labs is a company founded by former Apple executives. It focuses on smart systems for the home.

• It was reported on January 26th that Google had entered into an agreement to purchase British-based DeepMind for $500 million.
DeepMind specializes in development of Artificial Intelligence used in simulations, commerce and games.

Some of the more significant acquisitions that were announced in 2013, beyond the Dell privatization and Koch acquisition of Molex, included:

• IBM purchased SoftLayer in mid-2013 for $2.02 billion. SoftLayer is built to provide customers the highest performing cloud infrastructure available. It offers a single platform that takes data centers around the world that are full of the widest range of cloud computing options, and then integrates and automates them through a private network and advanced management system.

• About the same time, Cisco announced it was buying Sourcefire Inc for $2.7 billion. According to their web site, Sourcefire develops cybersecurity solutions for next-generation applications spurred on by the rising adoption of mobile technology, the evolving nature of cybercrime and corporate demand for systems which prevent data loss and theft.

• BMC Software Inc announced in May 2013 it had agreed to be acquired by a private investor group led by Bain Capital and Golden Gate Capital together with GIC Special Investments Pte Ltd and Insight Venture Partners in a deal valued at $6.9 billion. According to their website, BMC Software helps companies around the world put technology at the forefront of business transformation, improving the delivery and consumption of digital services.

• Also in May 2013, ASML Holding NV, a leading provider of lithography systems for the semiconductor industry, and Cymer, Inc., a leading supplier of lithography light sources used by chipmakers to manufacture advanced semiconductor devices, closed their deal whereby ASML acquired all outstanding shares of Cymer. The purchase was announced at $3.7 billion.

The list of acquisitions, mergers and divestitures goes on and on. How is the High Technology industry doing in 2014?  It is doing very well.

The price of hardware in almost all forms continues to drop as the competition grows. The need for smaller, faster, and multiple uses in smart phones, flat screens, tablets, and computers has been keeping consumers on the cutting edge of the markets. However, as mentioned earlier, profitability in the hardware business continues to drop on a per device basis. As demonstrated by the major M&A activities presented above, the forward thinking and pace-setters in high technology are seeking major sea changes in the software industry, and are seeking ways to further develop multiple uses and multiple applications for existing hardware. It will be very interesting to see how the M&A phenomenon evolve over the next twelve months.

Bio: Dr. C. R. (Buzz) Canup, President, Canup & Associates
Buzz Canup is the President and Founder of Canup & Associates, a management consulting firm specializing in site location studies for private industry and economic development consulting for countries, states, regions and communities. He has extensive experience working with world-class corporations on a global basis. His experience includes all phases of a project from concept to implementation, including feasibility analysis, strategic planning,  feasibility analysis, site location studies, incentives negotiations, property acquisition, permitting and zoning, engineering and construction management, recruitment and workforce development, and plant start-up and operations. Representative clients with whom he has worked include:  Michelin, Honda, Volkswagen, Audi, Navistar, Freightliner, Daimler Benz, Hewlett-Packard, and Dell. He may be contacted at bcanup@canup.com or through his website at www.canup.com.
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