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Sept. 4, 2019, 6:44 a.m. EDT

Software companies are spending billions on acquisitions, but how long will it last?

Companies like Salesforce and Google are rounding out their offerings, but fourth quarter could be key for continuing momentum

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By Wallace Witkowski, MarketWatch


Bloomberg News
IBM’s $34 billion deal for Red Hat is the largest of a wave of software acquisitions as companies look to offer more complete portfolios of services to customers.

Software companies are on an acquisition tear as tech companies seek to position themselves in a changing market that demands a focus on cybersecurity and artificial intelligence, but the wave of big-money deals could be stopped if hot cloud-software stocks take a pause.

There have been at least $70 billion in software acquisitions announced in the past 12 months, but the announcements have seemingly picked up in frequency over the past three months. In June, Salesforce.com Inc. /zigman2/quotes/200515854/composite CRM -1.42%  agreed to acquire Tableau Software Inc. for $15.7 billion, and Alphabet Inc.’s /zigman2/quotes/205453964/composite GOOG -0.60%   /zigman2/quotes/202490156/composite GOOGL -0.67%  Google Cloud agreed to buy analytics software company Looker for $2.6 billion in cash.

Neither company was done — Salesforce has since agreed to acquire ClickSoftware for $1.4 billion and Google acquired cloud-computing company Elastifile for an undisclosed sum. Competitors have jumped in too, with VMware Inc. /zigman2/quotes/209864107/composite VMW +0.04%  agreeing to spend about $5 billion to acquire cybersecurity company Carbon Black Inc.  and former spinoff Pivotal Software Inc. /zigman2/quotes/205113305/composite PVTL +0.07% , while Splunk Inc. /zigman2/quotes/203060494/composite SPLK -1.99%  agreed to buy cloud monitoring company SignalFX for $1.05 billion in cash and stock.

They are not alone — here are some of the biggest software acquisitions since last summer.

Acquirer Target(s)
IBM /zigman2/quotes/203856914/composite IBM   Red Hat, $34 billion
Microsoft Corp. /zigman2/quotes/207732364/composite MSFT   GitHub, $7.5 billion
Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO   Duo Security, $2.35 billion
SAP /zigman2/quotes/207905606/composite SAP   /zigman2/quotes/203458330/delayed DE:SAP   Qualtrics International Inc., $8 billion
Palo Alto Networks Inc. /zigman2/quotes/207599953/composite PANW   Demisto, $560 million; Twistlock, $410 million; RedLock, $173 million; PureSec, undisclosed

The acquisition drive has been driven by large tech companies seeking to shore up gaps in their offerings, primarily in the areas of cybersecurity, data analytics, and AI, according to Maribel Lopez, principal analyst at Lopez Research.

“For the most part, every single large IT vendor has some hole in one of those three areas that they need to fill,” Lopez told MarketWatch.

Stifel analyst Tom Roderick agreed, saying digital disruption trends are making tech companies scramble to shore up their gaps.

“From a fundamental angle, digital disruption in the enterprise has never been more prevalent, which means that large scale technology vendors at risk of being disrupted are moving faster and paying more aggressive multiples to acquire next generation businesses that help future proof their portfolio of products,” Roderick told MarketWatch.

Prime examples, Roderick said, are International Business Machines Inc. breathing life into its “moribund” cloud strategy by buying Red Hat, and SAP picking up Qualtrics just a month after the Utah-based software company had filed for an initial public offering. Those companies, like Salesforce especially, are doing everything they can to be a one-stop shop for businesses.

“Secondarily, behind fundamentals, you shouldn’t dismiss the tax reform act put in place in 2017 that served to repatriate meaningful levels of cash reserves for some of the biggest tech vendors in the U.S.,” Roderick said.

Lopez said that momentum may last for another few months but that depends on how the fourth quarter works out as the U.S. economy deals with President Donald Trump’s trade war with China and inverted yield curves. Software stocks were a big target for investors looking for continued growth in tech earlier this year, but the momentum has seemingly slowed.

While the iShares Expanded Tech-Software Sector ETF /zigman2/quotes/201870252/composite IGV -1.96%  is up 24% for the year to date, it’s only up 2.6% over the past three months. The ETFMG Prime Cyber Security ETF /zigman2/quotes/207892345/composite HACK -1.24%  is up 12% for the year but down 2% over the past three months. The First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY -1.65%  is up 19% for the year but flat over the past three months.

In comparison, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39%  and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.83%  are up about 16% and 20%, respectively, for the year, the S&P 500 is up 4.7% over the past three months and the Nasdaq is up 4.8%.

If stock prices stall out or turn around, the momentum for acquisitions — especially with stock — could turn around as well.

“If people’s stock get pummeled in Q4, they’re not going to be out buying things for a billion dollars,” Lopez said. “So if you’re a startup and you can get out with somebody in the coming like two, three months, it’s a good time to exit. After that, it could stall out for a bit.”

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N/A
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/zigman2/quotes/203856914/composite
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 137.41
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/zigman2/quotes/207905606/composite
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$ 129.13
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0.93%
Market Cap
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/zigman2/quotes/203458330/delayed
DE : Germany: Frankfurt
115.50
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N/A
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N/A
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/zigman2/quotes/207599953/composite
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$ 212.61
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P/E Ratio
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Dividend Yield
N/A
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$20.62 billion
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/zigman2/quotes/201870252/composite
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$ 207.99
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Oct. 18, 2019 4:10p
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/zigman2/quotes/207892345/composite
US : U.S.: NYSE Arca
$ 37.29
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Oct. 18, 2019 8:00p
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/zigman2/quotes/205187458/composite
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$ 55.58
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Oct. 18, 2019 4:00p
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/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
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Oct. 18, 2019 5:08p
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/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,089.54
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Oct. 18, 2019 5:16p
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Wallace Witkowski is a MarketWatch news editor in San Francisco. Follow him on Twitter @wmwitkowski.

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