Big Tech Returns To Building Conglomerates

Tech companies lead the way on M&A.

According to a new Citigroup report, companies that have not been generating significant organic growth over the past couple years are now takeover targets. And tech-sector companies are ready and able to buy.

“A large share of the [purchasing] firepower is held by a handful of technology titans, who have expanded aggressively and successfully beyond their sector boundaries,” states the Citi report, citing 10 firms—seven US and three Chinese—including Facebook, Alphabet and Alibaba.

According to Citi, corporate cash on hand plus untapped potential for debt stands at $10.6 trillion worldwide. The bank could not state the exact proportion held by these titans, but a Global Finance estimate based on public information suggests they hold, at a minimum, 5% of this capacity for acquisitions.

And they’ve been putting it to work, both within their core competencies and elsewhere. In recent years, Facebook bought a surround-sound designer and a rural phone company. Alibaba has been moving from internet infrastructure and e-commerce into content, buying up movie studios, sports venues and music distributors. That could be seen as simple vertical integration, but Alibaba is simultaneously buying up pharmaceutical and medical device companies. Tencent is following the same playbook, and has also moved into real estate, banking, agriculture and renewable energy.

“With more that 600 companies in its portfolio … Tencent Holdings has become one of the most active investors in the technology world,” according to the South China Morning Post. “The strategy has also provided Tencent with a steady profit stream at a time when its core businesses of social media and video games face intense competition and increased government scrutiny.” According to the article, Tencent entered into 163 deals in 2018 throughout Asia, Europe, Oceania, Africa and the Americas.

The Citi report concludes that this new wave of merger and acquisition activity will cause buyers to end up with more non-core assets than they can manage, and that investors will reward them for flipping new units that don’t fit in their portfolio.