Instagram & After: How The Business Of Technology Is Changing
It's not often that a two-year-old start-up becomes a $1 billion company.
Yet Instagram, a popular smartphone application that allows users to tweak photos and share them with their friends, was paid that by Facebook Inc in a deal announced on Monday.
The purchase of the San Francisco-based private company helps Facebook both strengthen its core photo-sharing services and take out a possible competitor all at once, analysts said. Venture capitalists that invested in Instagram before the Facebook deal reportedly doubled their money in the span of a few days.
Few retail investors can take part in these early funding rounds that become hugely profitable once a company goes public or is taken over by a competitor. But there are ways to profit from the growing social media and mobile computing sectors that don't involve giving money to a VC firm in Silicon Valley.
TECH M&A HEATING UP
The high price that Facebook paid for Instagram may be a sign mergers and acquisitions will pick up across the cash-rich technology sector, potentially making large companies more attractive.
"Facebook is very acquisitive and has a pretty robust M&A strategy which is only going to get more robust once they go public," said Ed Zimmerman, the head of the technology group at Lowenstein Sandler, a law firm that works with venture capital and private equity firms to negotiate and close deals.
Michael O'Bryan, the co-head of the M&A practice at Morrison & Foerster, said large-tech companies such as Google Inc, Apple Inc and Microsoft Corp will likely step up their acquisitions this year to keep up with the rapidly expanding social media and mobile markets.
These deals are focused more on finding products or apps that have buzz and momentum than on those that are profitable, he said. Purchases are typically meant to help them expand their platform of products and services in ways they may be lacking.
Google may be especially prone to signing new deals to better position itself for growth as its core business of web search and advertising faces new challenges.
"We see the growth of semi-closed and prominent networks including Facebook, Twitter and Siri/Apps in general as an increasing threat to Google - not only as competition for ad dollars, but also to search quality and therefore monetization," Daniel Ernst, an analyst at Hudson Square Research, said in March 29 note to clients.
Google shares have been stagnant lately, despite the market's 2012 rally. The stock price is down 2.9 per cent since the start of the year, compared with an 8 per cent jump in the S&P 500 index, based on afternoon trading on Tuesday. At around $633 per share, the company's shares are well below the average analyst target price of $721, according to Thomson Reuters data. The company reports its earnings on April 12 after the bell.
A jump in M&A activity would also mean more fees for the financial firms that structure deals. The value of global M&A deals dropped to $416 billion in the first quarter of 2012 from $737 billion over the same period in 2011, according to preliminary Thomson Reuters data. Mergers in the United States totaled $127 billion, a 60 per cent drop from 2011. JPMorgan Chase & Co, Goldman Sachs Group Inc and Citigroup Inc were the most active firms in the industry.
JPMorgan may be one of the strongest firms of the group because of a diversified base that includes a strong credit card arm, according to analysts at Trefis, an online stock analytics service. The company recently announced it would raise its dividend by 20 per cent, paying out 30 cents per quarter instead of 25 cents.
JPMorgan trades at a price to earnings ratio of 9.6, well below the nearly 14 multiple of the broad Standard & Poor's 500 index, and pays a dividend yield of 2.8 per cent. It is down 8 per cent over the last 12 months, a figure that includes its 29 per cent jump since the start of 2012.
Buy The Tolltakers
A less risky way to play the social media and mobile market could be to look at the telecommunications sector.
AT&T Inc and Verizon Communications Inc, for instance, are the largest US wireless data carriers and should be attractive to income investors, said John Manley, chief equity strategist at Wells Fargo Funds.
"These are classic yield plays. They are bond substitutes, with the kicker that they are in a pretty good growth business," he said.
AT&T offers a dividend yield of 5.8 per cent. The company's shares are largely unchanged since the start of the year, dropping only 0.3 per cent. Verizon offers a yield of 5.4 per cent. Its shares are down 8 per cent since the start of the year.
The iShares S&P Global Telecommunications ETF offers a way to expand this bet overseas. AT&T, Vodafone Group Plc, Verizon and Telefonica SA make up its largest positions. The $436 million fund yields 5.4 per cent and costs $48 cents per $100 invested. It is up 1.3 per cent since the start of the year.