Salesforce's $6.5 billion MuleSoft acquisition has Wall Street gearing up for a 'supersized' year in M&A

MuleSoft

MuleSoft founder Ross Mason plans to sell his company to Salesforce for $6.5 billion.

• Mega-acquisitions like Salesforce's planned $6.5 billion purchase of MuleSoft could become a big trend in 2018.
• The new tax law has freed up some $470 billion in overseas cash for the largest tech companies, and many may be looking to spend it on acquisitions, Evercore ISI analyst Kirk Materne said in a new research note.
• One big deal could create a "domino-like effect" and set many more deals into motion, Materne said.

Salesforce's planned acquisition of MuleSoft - as big a deal as it is - may end up being just one small chapter in what turns out to be an epic year for tech mergers and acquisitions.

Including the MuleSoft deal - which is valued at $6.5 billion alone - the tech industry's giants have allotted more than $9 billion toward mergers and acquisitions so far this year, according to research firm Evercore ISI. That make this year's M&A activity in tech already bigger than all of last year, when industry companies spent $8.6 billion on tie-ups.

And more could be on the way. Indeed, one big move - say one valued at $10 billion or more - could lead to an onslaught, Evercore ISI analyst Kirk Materne said in a research note Friday.

"Given there are only so many targets that are 'needle moving,' we believe that if one of the larger software companies is acquired, it could create a domino-like effect as strategic buyers jockey for position," Materne wrote.

The merger mania is being driven in large part by the new tax law, he said. Many tech companies had been stockpiling cash overseas to defer paying taxes on their foreign profits. The new law required companies to pay taxes on those holdings immediately but at much reduced rates. And it bars US taxes on future overseas profits.

Thanks to that new law, the largest tech companies repatriated more than $470 billion in cash from their overseas holdings at the beginning of 2018, Materne said.

That mass movement of cash "should result in a bottomless well of capital to fuel a significant wave of software M&A," he said.

Helped in part by the tax law's reduced rates, the 10 largest tech companies will generate around $800 billion in free cash flow over the next three years, Materne estimated. While companies will likely use much of this cash on share repurchases and dividends, they should still have ample left over for acquisitions, he said.

"With over $1 trillion in unlevered buying power between just the 10 largest tech companies ... it only takes one big deal (greater than $10 billion) to set off a potential 'domino effect,'" Materne said.

In the enterprise software sector, the mergers are likely to be spurred by the increasing adoption of cloud computing and efforts by the various players to get an advantage in that market. But it's not just enterprise companies that are gearing up for new tie-ups.

Apple, which had $245 billion overseas cash stash before the tax law was passed, could be a particularly active player in the M&A market. Analysts think it may have its eyes on augmented reality company Magic Leap or fitness startup Peloton.