The big technology firms such as Google, Microsoft and Facebook have been gobbling up rivals at a relentless pace over recent years – and they are likely to continue doing so.
Tapping in to this could provide you with an investment win.
When a large firm is on the takeover trail it pumps money into the sector it’s in, either through spending its own cash pile or borrowing from investment banks.
And if the target is listed then that company’s share price invariably soars.
Google ‘s office in St Pancras, London.
In order to have a realistic chance of a majority of shareholders accepting any offer, it has to include a healthy ‘takeover premium.’
This mean offers can be 20 per cent, 30 per cent or even 50 per cent higher than the target’s undisturbed share price at the time of the bid.
Once an offer is made public, the shares will jump to very near the offer price instantly, resulting in big gains for shareholders.
There are many reasons why the likes of Google and Facebook choose to buy out their peers and rivals, but there are usually a couple of key motives.
The first is to acquire new technology and intellectual property a company does not already have. It is much quicker, and potentially cheaper as well, to buy a company than to develop a similar technology in-house.
The second can simply be to kill off a potential competitor and absorb their share of the market before they get too big and do it to you. Facebook’s famous buyouts of WhatsApp and Instagram are arguably examples of this.
A new research report compiled by brokerage firm IG dubbed ‘Acquisitive Tech’ lays bare the scale of tech takeover activity since 1991.
As you can see below, the top ten most acquisitive tech firms have spent between $83billion and $7billion each on buying up other companies since 1991 or launch, if later than 1991.
IT company Cisco has spent the most on takeovers, followed by the likes of Microsoft, Intel and Google, according to IG’s Acquisitive Tech report.
In terms of the number of deals, Google is top of the pile with an average of 10-11 deals a year, ahead of Cisco, IBM, Facebook, Microsoft and Amazon.
Other very familiar names snapping up companies at a good clip include Apple and Sony.
Google has been buying out other companies at an average rate of 10 – 11 a year.
Turning to look at the biggest individual deals, Microsoft is on top with its $26billion takeover of LinkedIn, followed by HP’s $25billion deal to buy Compaq and Facebook’s $19billion WhatsApp takeover.
Microsofts $26billion takeover of LinkedIn was the biggest tech deal ever recorded, according to the Acquisitive Tech report.
So how can investors turn this to their advantage?
Some see US shares and tech companies in particular as expensive at the moment, and short term trouble for the sector can not be ruled out.
So as ever, invest with caution, particularity if you may need your money back soon. In the mid and long term however, tech investments are a great bet.
Trying to guess which individual companies will be snapped up soon is tricky at best though. Sometimes those tipped widely for takeover never get bought, while companies few saw as a target are snapped up.
So instead of trying to second guess the tech giants’ shopping lists, the best bet is to add some good technology funds to your portfolio which offer exposure to a basket of companies, as head of active portfolios at AJ Bell Ryan Hughes explains.
‘The continued march of technology in our lives seems to continue unabated and the major dominant players are looking to take an ever increasing stake in all of our daily activities,’ noted Hughes.
‘As a result, we are seeing consolidation of sorts in technology companies with many being bought out by the big players as they look to gain access to new, up and coming technologies.’
Facebook’s $19billion WhatsApp takeover is one of the biggest tech deals ever done.
‘These big players are now so large that some of these deals are just pocket change and some of the technologies they are buying may never become a major commercial success but that is the nature of technology investing when things are developing so fast.’
‘If you are looking at buying into direct companies, the important rule to remember is never buy a company just because you think it might get taken over,’ Hughes continued. ‘This is a dangerous strategy that often ends in tears. A far better approach is to invest in specialist funds of technology companies that can spread the risk.’
As with most sectors of the investment world there are plenty of options to choose from. Hughes offered some suggestions which serve as a great starting point in your deliberations.
Polar Capital Global Technology
‘If you want broad based technology exposure, then the stand out team is the Polar Capital team led by Nick Evans and Ben Rogoff,’ Hughes said. ‘Their fund is well established and has exposure to the major players in the market like Apple, Amazon and Facebook but it also includes many smaller, emerging companies that won’t be well known.’
Smith & Williamson Artificial Intelligence Fund
‘The fast growing sector of technology is now the AI and robotics space and a couple of funds have emerged here. The fund run by Chris Ford looks interesting and while it’s early days, this theme could very well become the next big idea in technology investing.’
Allianz Technology Trust
‘If you prefer an investment trust structure, then the Allianz Technology Trust run by the experienced Walter Price may be of interest,’ said Hughes. ‘Managed from San Francisco, close to Silicon Valley, this is focused on all aspects of technology but be aware it is currently trading on a premium, meaning that you are paying more than the assets are worth when buying the shares.’