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IBM Pays For Speed
Time is money, and IBM (NYSE:IBM) is willing to pay plenty of money to Netezza (NYSE:NZ) shareholders to offer a faster data analytics solution to its customers. (For more stock analysis, see Best Dividend Stocks.)
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Before Monday's open, IBM announced an agreement with Netezza where it would pay $27 a share in cash for the smaller technology company. While $27 a share is not a huge premium relative to Netezza's closing price on Friday, the stock had been on a tear since a strong earnings report in late August lifted the shares from a base in the low-to-mid teens. Paying an enterprise value to revenue multiple of almost seven, it is difficult to say that Netezza is selling itself cheaply.
What IBM is Getting
IBM has long since shed its "big iron" legacy and its middleware and data service business are a very significant part of its business. Within that, customers have increasingly turned to companies like IBM, Oracle (Nasdaq:ORCL) and Teradata (NYSE:TDC) to help them integrate their platforms and analyze large volumes of data in ever-shorter times. This is where Netezza comes in; Netezza boasts query speeds that are 10- to 100-times better than more traditional approaches, and its purpose-built data warehouse appliances have made it a strong competitor to the aforementioned Oracle, Teradata and its new owner, IBM.
The Land Rush Continues
These are good time to be a technology company in the sub-$2 billion space. 3Par (NYSE:PAR) got a shockingly rich bid due to a battle between Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ), and HP followed up that with a buyout of ArcSight (Nasdaq:ARST). It stands to reason that companies like Microsoft (Nasdaq:MSFT), Oracle, IBM, Dell and so on will stay active in M&A in their unending efforts to one-up each other, and that could spell more attention for companies like CommVault (Nasdaq:CVLT), Fortinet (Nasdaq:FTNT), Tibco (Nasdaq:TIBX) and others in that sub-$2 billion space.
By tfhe same token, who is to say that this is the end of the story for Netezza? If Dell was willing to push hard against HP in an attempt to buy 3Par, is it unreasonable to think they may make a run at Netezza? Once again, Dell would find itself against a larger company with deeper resources, but perhaps they could at least make IBM sweat a bit. By the same token, maybe Dell takes a run at Teradata. It looks like it is "silly season" in the tech sector, so it is hard to say when the merry-go-round is going to stop.
The Bottom Line
Buying Netezza makes sense for IBM, even if Big Blue is handing over a lot of green to do the deal. It can also be a sign that the tech sector (at least the software/application) is on relatively sound footing. It seems unlikely that so many companies would be scrambling for assets if there was not a strong anticipation that the business will be there to validate the purchase prices. Moreover, if the economic recovery continues to be tepid, that may be bad for jobs and good for software - a slow-growth recovery could prove the incentive needed for companies to enhance productivity but minimize payroll, and more IT spending could fit that bill. Accordingly, investors just may want to bone up on technology, as it seems to be one of the few areas outside of hard assets where companies are making bids.
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
Before Monday's open, IBM announced an agreement with Netezza where it would pay $27 a share in cash for the smaller technology company. While $27 a share is not a huge premium relative to Netezza's closing price on Friday, the stock had been on a tear since a strong earnings report in late August lifted the shares from a base in the low-to-mid teens. Paying an enterprise value to revenue multiple of almost seven, it is difficult to say that Netezza is selling itself cheaply.
What IBM is Getting
IBM has long since shed its "big iron" legacy and its middleware and data service business are a very significant part of its business. Within that, customers have increasingly turned to companies like IBM, Oracle (Nasdaq:ORCL) and Teradata (NYSE:TDC) to help them integrate their platforms and analyze large volumes of data in ever-shorter times. This is where Netezza comes in; Netezza boasts query speeds that are 10- to 100-times better than more traditional approaches, and its purpose-built data warehouse appliances have made it a strong competitor to the aforementioned Oracle, Teradata and its new owner, IBM.
These are good time to be a technology company in the sub-$2 billion space. 3Par (NYSE:PAR) got a shockingly rich bid due to a battle between Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ), and HP followed up that with a buyout of ArcSight (Nasdaq:ARST). It stands to reason that companies like Microsoft (Nasdaq:MSFT), Oracle, IBM, Dell and so on will stay active in M&A in their unending efforts to one-up each other, and that could spell more attention for companies like CommVault (Nasdaq:CVLT), Fortinet (Nasdaq:FTNT), Tibco (Nasdaq:TIBX) and others in that sub-$2 billion space.
By tfhe same token, who is to say that this is the end of the story for Netezza? If Dell was willing to push hard against HP in an attempt to buy 3Par, is it unreasonable to think they may make a run at Netezza? Once again, Dell would find itself against a larger company with deeper resources, but perhaps they could at least make IBM sweat a bit. By the same token, maybe Dell takes a run at Teradata. It looks like it is "silly season" in the tech sector, so it is hard to say when the merry-go-round is going to stop.
The Bottom Line
Buying Netezza makes sense for IBM, even if Big Blue is handing over a lot of green to do the deal. It can also be a sign that the tech sector (at least the software/application) is on relatively sound footing. It seems unlikely that so many companies would be scrambling for assets if there was not a strong anticipation that the business will be there to validate the purchase prices. Moreover, if the economic recovery continues to be tepid, that may be bad for jobs and good for software - a slow-growth recovery could prove the incentive needed for companies to enhance productivity but minimize payroll, and more IT spending could fit that bill. Accordingly, investors just may want to bone up on technology, as it seems to be one of the few areas outside of hard assets where companies are making bids.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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