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Tech deals at sub-peak prices create some stock losers

Signs for Hewlett Packard Enterprise Co. cover the facade of the New York Stock Exchange Nov. 2, 2015.

© / Reuters

Odds are if a technology company is being acquired, some shareholders are left with a losing bet.

Hewlett Packard Enterprise Co. said on Tuesday that it would acquire Nimble Storage Inc. for about $1-billion. The rub for Nimble stockholders is that the deal price of $12.50 a share is 78 per cent below the company's record intraday stock price of $58 set in late February 2014, not long after its IPO. (Nimble's all-time closing share price was a few days earlier, at $56.23.)

That means some Nimble stock owners may be holding shares that are certified duds.

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Nimble never recovered from a broad stock market swoon in early 2014 that hurt many richly valued tech companies. But the company is far from alone in selling at less than its peak share price.

According to Bloomberg data, 95 per cent of acquisitions of public U.S. tech companies in the last two years have come at a share price lower than the companies' record intraday prices. The Bloomberg Gadfly analysis examined 75 U.S.-based tech companies that have been acquired since the start of 2015, or have acquisitions pending, for deal values of $200-million or more.

There are some understandable reasons for the prevalence of these tech acquisitions at below-peak stock prices. First, some public tech companies simply never recovered from their inflated dot-com era share prices. Dell Technologies Inc., for example, bought EMC last year for $24.05 a share, far less than EMC's $102.64 record share price in 2000. That's not a huge deal. Not that many stockholders stuck around if they had bought EMC shares way back when.

Second, the prevalence of below-peak M&A reflects the nature of technology dealmaking these days. Private equity firms have been busy in the tech industry, and many of the firms they're scooping up are unloved software companies whose best days seemed to be behind them. Naturally, those are the types of companies that have a hard time on public markets.

Qlik Technologies Inc., Marketo Inc. and Rackspace Hosting Inc. each agreed to a multibillion-dollar sale to a private equity firm but at less than peak share prices. Each also had question marks about the viability of its technology or business model.

And then there are companies, like Nimble Storage, which foundered after experiencing some success and felt it wasn't worth sticking around to see whether they could bounce back from their rough patches. LinkedIn Corp. opted to sell itself to Microsoft Corp. last year soon after a swoon in its share price. Microsoft didn't get a steal, but the purchase price was 29 per cent below LinkedIn's record intraday stock price set 15 months before the sale. Even a few months before Microsoft swooped in, LinkedIn shares were trading above Microsoft's $196-purchase offer.

Sure, shares of LinkedIn might have recovered from an early 2016 market correction that hurt it and other highly valued tech companies, but maybe they wouldn't have. As I wrote at the time, several companies caught in the market downdraft got spooked into selling. They had plenty of company. Oracle Corp. in 2016 bought three public software companies for less than their record share prices -- NetSuite, oPower and Textura. Like Nimble, those companies' technologies may never been as good as their record share prices indicated.

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The track record of below-record tech dealmaking isn't a disaster. But it is a useful note of caution for people holding on to shares of companies in the hope that they will be acquired and transform a loser bet into a winner. (Ahem, Twitter.) In technology, what goes up and then down doesn't necessarily go back up.

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Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

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