5 Software Companies That Could Be Acquired If Tax Reform Happens

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Needless to say, massive tax reform is way overdue in this country, but the chances of anything major happening this year are slim to none. There is, however, a reasonable chance that some reform does get passed, which would include lowering the actual taxation levels and approving a one-time lower tax level on overseas corporate cash. While some argue that allowing companies, especially the big technology giants, to bring cash back cheaper won’t spur growth, others maintain it could unlock a wave of mergers and acquisitions.

A new research report from Merrill Lynch’s Tal Liani makes the case that several high-profile software companies could become targets if big tech becomes suddenly flush with their overseas cash. All would make good bolt-on acquisitions and already have established proven track records of success. And the all have Buy ratings at Merrill Lynch.

Apptio

This small cap company could be in the sights of a larger player and had a reasonably hot IPO last year. Apptio Inc. (NASDAQ: APTI) is the leading cloud provider of technology business management (TBM) software solutions to global enterprises. Apptio’s cloud based SaaS (software-as-a-service) platform helps chief information officers and information technology (IT) professionals strategically manage and forecast IT costs. As of last year, Apptio had over 325 customers across a wide range of industries.

Apptio currently sells five applications: Cost Transparency, IT Benchmarking, Business Insights, Bill of IT and IT Planning. In November the company announced several new modules and feature additions at the annual TBM Conference in San Diego. New modules (Project Financial Planning, Services Demand Planning and SaaS Insights) will be sold separate from the core app. Top Wall Street analysts were encouraged by these releases and believe the company may be positioned as the best of breed TBM vendor.

The Merrill Lynch price target on the shares is $20. The Wall Street consensus target is $21.71. The shares traded early Monday at $19.05.

Box

This is another likely target that could bring value to an acquirer. Box Inc. (NYSE: BOX) provides a cloud platform for file sharing and storing, and over the past several years it has evolved into an enterprise content management and collaboration platform. Box is headquartered in Los Altos, California. It has approximately 1,500 employees, including over 700 in sales and marketing. The company employs a direct sales team, as well as indirect channels, to expand the business.

The company posted solid second-quarter results against very tough comparisons. Merrill Lynch feels that Box could have a $1 billion run rate by fiscal 2021. The company also announced several new products/partners, including AI integrations. A new strategic partnership with Microsoft Azure could potentially be significant and accelerate growth.

Merrill Lynch has a $23 price target, which compares with the consensus price objective of $24.36. Shares traded Monday at $19.25.

Splunk

This stock remains a top buy on Wall Street. Splunk Inc. (NASDAQ: SPLK) provides a software platform for collecting, storing, indexing, searching and analyzing machine generated data, such as log files and configuration files, which are prevalent in every type of IT system, device and application.

Splunk technology is potentially applicable and disruptive in several market segments, including IT operations, security and compliance, and business intelligence. These market segments are collectively worth $28 billion today.

The company reported solid second-quarter results. TheCloud continues to gain ground with revenue above 20% quarter over quarter and more than doubling year over year to $21 million. Billings also outperformed at over 32% year over year to $303 million and a comfortable 7% ahead of consensus. Better top-line helped profits as well, with earnings operating cash flow beating consensus estimates.

The $80 Merrill Lynch price target compares with the posted consensus of $74.71. Shares traded at $66.80 on Monday.

ServiceNow

This red-hot stock has had an outstanding year. ServiceNow Inc. (NYSE: NOW) develops and sells a hosted, subscription-based suite of services designed to automate various IT department functions, such as help desk, operations management and change/release management.

The company also sells a number of applications that automate various self-service-related applications outside of the IT department, such as HR onboarding, facilities requests and governance, risk and compliance.

Merrill Lynch has set its price target at $136. The consensus target is lower at $127.33. The stock traded at $122.25 a share.

Tableau Software

This company has been a rumored takeover target for some time. Tableau Software Inc. (NASDAQ: DATA) provides business analytics software products in the United States, Canada and elsewhere. The company offers Tableau Desktop, a self-service analytics environment that empowers people to access and analyze data independently, and Tableau Server and Tableau Public, a free cloud-based platform for analyzing and sharing public data.

Merrill Lynch recently returned the stock to its top picks list and noted this in an earlier research report:

Recent partner feedback suggests strong continued enterprise traction. Look for upside to our 5% second quarter license equivalent bookings estimate. At 24 times 2018 free cash flow, and underappreciated upside potential to 38% FCF growth from sales productivity.

The Merrill Lynch price target is $84. The consensus target is $71.13, and shares were last seen at $77.35.

These five up and coming software companies are possible targets for big technology if Congress is able to pass at least a mini tax reform bill that includes repatriation. With an economy stuck in low gear, they have incentives to pass something to rev things up.