Tech Companies Go Shopping AbroadBy
U.S. technology companies are in a bind. Although they are cash-rich, much of their hoard is parked abroad and they risk a hefty tax bill if they bring profits from overseas back home. They have joined other U.S. businesses in lobbying for a tax holiday for repatriated earnings, but with no prospects of success in the near term, they're looking for something to do with that money. "We should see more tech cross-border acquisitions because of the cash trapped abroad," says Drew Guevara, who runs Morgan Stanley's (MS) West Coast technology investment banking group in Menlo Park, Calif.
A pickup in overseas mergers and acquisitions is already visible. The volume of cross-border tech deals involving a U.S. buyer has reached $7.6 billion so far this year, a 168 percent increase from the same period in 2009, according to Bloomberg data. In February, Micron Technology (MU) agreed to pay $1.3 billion for Numonyx Holdings, a Swiss maker of flash memory chips. Of Google's (GOOG) 22 acquisitions this year, 7 have been abroad, including the purchase of Israel's LabPixies in April and Sweden's Global IP Solutions in May. And Intel (INTC) announced on Aug.30 that it was buying the wireless business of German chipmaker Infineon Technologies for $1.4 billion.
Speaking at a conference in Boston in June, Cisco Systems (CSCO) Chief Executive Officer John Chambers said he plans to be "very aggressive outside the U.S." if the tax rules don't change in the next year or so. Cisco has $30 billion of its $38 billion in cash parked abroad because of higher U.S. taxes, he said. It has spent $22.2 billion on 87 acquisitions in the last 10 years; 11 were outside the U.S. Its biggest overseas deal was its $3 billion purchase last year of Norwegian videoconference equipment maker Tandberg.
"The U.S. system needs a long-term reform to compete with the rest of the world," says Dean Garfield, CEO of the Information Technology Industry Council, a Washington-based trade group. Tech companies have been so vocal on repatriation because many are cash-rich and relatively debt-free. That lets them scoop up a hot startup or invest heavily in a new gadget. The eight largest tech companies are sitting on $300 billion in cash, according to data compiled by Bloomberg. C. Fritz Foley, an associate professor of international financial management at Harvard Business School, notes that once Japan and the U.K. amend their tax codes later this year, the U.S. will be the only country in the Organization for Economic Cooperation and Development to double-tax foreign profits.
Finding attractive acquisition targets abroad can be difficult, say some bankers. Autonomy, Britain's No. 2 software company, which gets 70 percent of its sales from the Americas, might look attractive to Oracle (ORCL), for instance. But with an enterprise value of $5.8billion, or seven times sales, it would make a costly acquisition. "The interesting companies in growth markets are very expensive," says Storm Duncan, global head of technology M&A at Credit Suisse (CS) in San Francisco.
The bottom line: U.S. tax laws make cross-border takeovers attractive for American tech companies. Targets are not all that plentiful—or affordable.