These tech giants may be gearing up for post COVID-19 acquisitions
The next generation of tech companies powering work-from-home capabilities have been building their cash war-chests somewhat under the radar amidst the COVID-19 pandemic.
And it could be a matter of time before they pull the trigger on some acquisitions that solidify their positions in the future of work. Yahoo Finance casts the spotlight here on Slack (WORK) and Dropbox (DBX).
“Dropbox and Slack in my opinion will both look at potential M&A to further expand their product footprints in this new post COVID landscape,” points out Wedbush Securities tech analyst Dan Ives. “Collaboration and storage around cloud is a major theme and we would expect more opportunities on the private front, especially with valuations under pressure in some areas.”
Slack raised $862.5 million in cash via a convertible debt offering on April 9. The company ended its fiscal fourth quarter ended Jan. 31 with an impressive $768 million in cash and equivalents, so the debt raise only adds to that impressive cash pile.
It’s not as if Slack needs all that cash or the debt offering — the company is virtually debt-free and is not a capital intensive business. The company only put $49 million to cash to work on capital expenditures for the fiscal year ended Jan. 31 after spending $56 million the year before. Moreover, despite general business certainty Slack’s recurring revenue business has seen a strong uptick during the coronavirus. So, it’s not like Slack is gearing up for a severe downturn in its business.
Slack co-founder and CEO Stewart Butterfield sounds like a man open to pulling the trigger on a deal.
“We had a pretty big balance sheet already, but really wanted to be in the position to take advantage of opportunities as they arose. There’s nothing specific in mind. It could be marketing programs. It could be M&A. There’s a great deal of uncertainty especially looking towards the second half of the year. So being in a position where we can be aggressive if we want to be is a good idea,” Butterfield said on Yahoo Finance’s The First Trade recently.
Dropbox co-founder and CEO Drew Houston also has a ton of cash and an open mind.
The company ended the first quarter ended March 31 with $1.1 billion in cash and equivalents. That tally is poised to grow this year — the company has projected as much as $480 million in free cash flow in 2020.
Similar to Slack, Dropbox is pretty much debt free. Dropbox only (relative to their strong cash position) put $136 million to work in capex for all of 2019.
“It has always been important to us to have a strong balance sheet. And it [the cash] gives us an opportunity to play offense. And of course, we’re going to continue to run the business. But we are always on the lookout for great companies and potential acquisitions, who could be additive? And we’ll do that in a a disciplined way. But just having the strong fundamentals has always been really important to us even before all of this happened,” Houston told Yahoo Finance on uses of cash.
Slack and Dropbox, have been quite successful in gaining new business amid the shift to work from home. They don’t have to go out and overpay for growth. Both business models are proving spot on in the current environment and will likely emerge post COVID-19. Look for the highly experienced Butterfield and Houston to add businesses that make sense to support the future of work and could be scaled up through their own efforts.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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