- Mega-acquisitions like Salesforce's planned $6.5 billion purchase of MuleSoft could become a trend this year.
- The new tax law has freed up some $470 billion in overseas cash for the largest tech companies, and many may be looking to spend it on acquisitions, according to the Evercore ISI analyst Kirk Materne.
- One big deal could create a "domino-like effect" and set many more deals into motion, Materne said.
As big a deal as Salesforce's planned acquisition of MuleSoft is, it may be just one small chapter in what turns out to be an epic year for tech mergers and acquisitions.
According to the research firm Evercore ISI, the tech industry's giants have allotted more than $9 billion toward mergers and acquisitions so far this year — including the MuleSoft deal, valued at $6.5 billion alone. That make this year's M&A activity in tech already bigger than all of last year, when industry companies spent $8.6 billion on tie-ups.
And more could be on the way. One big move — say, one valued at $10 billion or more — could lead to an onslaught of "supersized" mergers and acquisitions, the Evercore ISI analyst Kirk Materne said in a research note Friday.
"Given there are only so many targets that are 'needle-moving,' we believe that if one of the larger software companies is acquired, it could create a domino-like effect as strategic buyers jockey for position," Materne wrote.
The merger mania is being driven in large part by the new tax law, he said. Though many tech companies had been stockpiling cash overseas to defer paying taxes on their foreign profits, the new law requires companies to pay taxes on those holdings immediately but at reduced rates. And it bans US taxes on future overseas profits.
Thanks to the new law, the largest tech companies repatriated more than $470 billion in cash from their overseas holdings at the beginning of the year, Materne said, adding that the mass movement "should result in a bottomless well of capital to fuel a significant wave of software M&A."
Helped in part by the reduced rates, the 10 largest tech companies are estimated to generate about $800 billion in free cash flow over the next three years, Materne said. While they're likely to use much of this cash on share repurchases and dividends, they should still have ample left over for acquisitions, he said.
"With over $1 trillion in unlevered buying power between just the 10 largest tech companies ... it only takes one big deal (greater than $10 billion) to set off a potential 'domino effect,'" Materne said.
In the enterprise software sector, mergers are likely to be spurred by the increasing adoption of cloud computing and efforts by the various players to get an advantage in that market.
But it's not just enterprise companies that are gearing up for new tie-ups. Apple, which had a $245 billion overseas cash stash before the tax law, could be a particularly active player in the M&A market. Analysts think it may have its eyes on the augmented-reality company Magic Leap or the fitness startup Peloton.
SEE ALSO: Wall Street is getting heartburn trying to swallow Salesforce's rich $6.5 billion MuleSoft deal
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