LinkedIn Madness and 3 Reasons Why M&A is Hot in the SaaS Space

Yesterday the tech industry was shocked by the news that Microsoft was buying Linked by an astonishing $26 billion. The acquisition represents one of the largest deals in the history of the tech industry and by far Microsoft’s biggest M&A event to date:

Regardless of the magnitude of the Linkedin sale, we shouldn’t see it as an isolate it event. In the last few months the technology sector and SaaS companies specifically have become active M&A targets. Just this month, SaaS market leaders Marketo and Qlik were bought by private equity firms while Salesforce acquired ecommerce leader Demandware. This increase in M&A activity in the SaaS technology space is based on a combination of unique factors that seem to be affecting many companies in the space:

Stocks Under Pressure

One of the interesting details about LinkedIn’s acquisition, is that the conversations with Microsoft seem to have started in February this year. Interestingly enough, that seems to align with the collapse of the LinkedIn stock after February earnings report.

LinkedIn is not an isolated example. Public SaaS stocks have been underperforming and under pressure since the beginning of the year which makes them an attractive target for acquisition.

Slow Growth

Growth is one of the main metrics used to evaluate publicly traded SaaS companies. In many cases, growth has been slowing down and consequently affecting the performance of the stocks. In order to improve growth, SaaS companies tend to increase the spend in areas like sales and marketing which contributes to the negative perception of the public markets.

Debt is Cheap and Incumbents Have Very Solid Cash Positions

Microsoft will use debt mechanism to finance the LinkedIn acquisition. This might come as a surprise considering that Microsoft has declared that it has more than $100 billion in cash and cash equivalents. By using a debt mechanism, Microsoft will avoid paying the 35% tax required to repatriate that cash from overseas and could deduct interest payments which could help with the US tax bill.

The Microsoft model is an example of how debt mechanism are both available and very cheap for big technology companies like Apple, Google, IBM, Oracle, etc with big cash positions overseas. Also, the strong cash position of these companies is another factor favoring the M&A climate.

Who is Next?

A lot has been speculated about who will follow LinkedIn as the next big acquisition of the year. Twitter seems to be the most popular name within the tech analyst community. However, a group of Goldman Sachs’ tech analysts just published a list of 12 companies that could be acquisition targets. Some of the names in the list might surprise you.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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