14 October 2010
Looking for Dance Partners
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Jonathan Goldberg, CFA
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Tom Ernst Jr
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Chris Whitmore, CFA
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Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank’s Research Product Committee has deemed this work F.I.T.T. forinvestors seeking differentiated ideas. Here our technology analysts havecollaborated to produce an in-depth look at the changing industry landscape whichblurs the line between hardware, software and service to gauge the drivers for anacceleration in Mergers and Acquisition activity. We then identify likely pairings.Deutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P) 007/05/2010
Research TeamData Networking/Wireless EquipmentBrian Modoff
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Application SoftwareThomas Ernst
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IT HardwareChris Whitmore
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Infrastructure SoftwareTodd Raker
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Electronics Supply ChainSherry Scribner
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undamental: Surging demand in data
Data growth is surging, taxing the ability of service providers to keep up theircapex in infrastructure. The advent of Web 2.0 for the consumer (socialnetworking) and the enterprise (XaaS) are forcing changes in spending patternsand pushing companies to consolidate.
ndustry: The network as a computer
We see discrete IT segments merging together as networking trends change andconsolidation shrinks the landscape. Increasingly, companies are looking toexpand beyond their traditional space. Oracle has entered the hardware marketand Cisco now sells servers. The changing nature of data usage has promptedcompanies to bundle more into their offerings, capturing more value and buildingdefensible barriers to entry.
hematic: Clouds, datacenters, virtualization and everything as a service
Virtualization, in its many versions, has enabled the coming transition to datacentercomputing or ‘cloud computing’. We think this will eventually prompt the majorsolution vendors to move from selling equipment or licenses to offering servicesin a more flexible and dynamic manner.
hought-Leading: Buy vs. build; time to market vs. time to integrate
Academic studies show that most M&A transactions fail to meet their value-creation targets. The rapidly shifting technology landscape pressures companiesto acquire and rapidly bring new bundled solutions to market. Often overlooked isthe ability to integrate those acquisitions into corporate structures, technologyroadmaps and channel agreements. We believe integration may prove to be moreimportant than acquisition target.
The “Big Eleven” and the M&A basket
We think Apple, Cisco, Dell, EMC, Google, HP, IBM, Intel, Microsoft, Oracle andQualcomm are the Big Eleven, with the size and cash balance to make majoracquisitions. With one exception, we think none of these will be targets in theirown right. In this report, we walk through which companies could emerge as theBig Eleven’s potential targets as they seek to plug gaps in their strategic plans.
Buyers are trading at a discount, targets at a premium, but both have upside
We analyze accretion/dilution impacts of deals on the acquirer’s share price. Thelikely buyers already reflect a discount which we think overstates the dilutiveimpact of many deals. Targets are trading at a premium to peer group averages,but are still below recent precedent transactions. Investing in anticipation of anacquisition is risky, but we believe many stocks still have upside potential.