Wednesday, April 29, 2009

Betting on M&A Skills

We constantly hear about tech companies' strong balance sheets. While some, like Apple (AAPL) and Microsoft (MSFT), seem intent on building the largest pile of cash possible, others will no doubt use their cash to begin making acquisitions in the next year.

One lens to apply to your stock selection then should be judging a company's M&A purchase and integration skills. Some companies -- like Yahoo (YHOO) and EBAY -- have a track record of making lots of unrelated acquisitions at inflated prices (today we read about YHOO shutting down its 1999 GeoCities group because it's not competitive). EBAY is now in the process of unwinding itself from that failed approach and it's likely that things will change in this regard under Carol Bartz at YHOO.

When MSFT has made acquisitions (like aQuantive or its investment in Facebook), it's over-paid, giving the sense it's more desperate than thoughtful. Fears about its lack of M&A integration skills among its management team helped push investors to urge Ballmer to drop the YHOO bid last year.

The three tech companies who have proven themselves adept at making strategic deals at fair prices and then quickly integrating them into the fold are Oracle (ORCL), IBM, and Cisco (CSCO). There are more deals ahead for the sector and these companies have an edge for their shareholders in seeking out the best of what's for sale.

Position: Long MSFT.

Originally published in on 4/24/2009 9:43 AM EDT

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