* Taking the pulse of capital allocation in tech
With cash balances ballooning and valuations under pressure, we evaluate capital allocation decisions being made across mega cap tech. We focus on 11 companies across the commtech, hardware, internet, semiconductor and software sectors.
* Stacking up the players
For each company, we evaluate (1) the current level of capital being invested in the business, (2) the returns being generated on those investments, and (3) the current level of capital being returned to shareholders.
* Trends that could drive M&A
With cash balances that have grown over the last 5 years for 9 of the 11 companies we examined (by 46% on average), we believe both more aggressive capital returns and or increased M&A would make sense, especially as returns (defined by CROCI) have largely been on the decline for the last 5 years.
* A company-by-company guide
We assess potential use of capital for each large cap tech player based on our analysis. We believe MSFT, ORCL, IBM, SAP and QCOM could benefit from M&A. We think IBM could support an acquisition of system/application software assets up to $38bn given its focus on growth in analytics, cloud, and SaaS. We also see GOOGL and AAPL as having the balance sheet strength to increase or in the case of GOOGL initiate capital returns while continuing to invest for organic growth.
* Software M&A history
We lay out historical M&A trends in software to provide context on the current environment. ORCL and SAP have been the leading consolidators since 2003, and we note a shift toward nextgeneration SaaS acquisitions starting in 2011.