Wall Street Beat: What keeps tech execs up at night?

Competitive pressure fuels M&A, which then leads to enhanced risks at today's high valuations

Technology stocks are up for the year, and while high company valuations may boost compensation for some executives, it doesn't necessarily help them sleep easier at night. In fact, those high share prices can be a cause for concern.

The pace of change in tech with the subsequent need to innovate rapidly is a major worry for leaders at tech companies, fueling mergers and acquisition activity. In turn, the high valuations involved with tech M&A these days put a tremendous amount of pressure on company executives to make them work, according to Aftab Jamil, leader of the technology and life sciences practice at BDO, the network of public accountancy firms.

"High valuations and the high profile of some of these deals increases chances for negative consequences to be more impactful," Jamil said. Absorbing a tech company is a complex task, and when the price tag for an acquisition is high, there is a great deal of scrutiny on company leaders to pull it off successfully, Jamil said.

Despite a bumpy recovery from the recession in the U.S., stalled growth in areas of Europe, and a slowdown in some high-flying markets like China, computer stocks on the Nasdaq are up about 5 percent for 2014 and 29 percent from a year ago.

There appears to be underlying confidence in software-as-a-service, mobile and cloud technology. IDC is forecasting global IT spending to rise 4.1 percent in constant currency this year, to US$3.7 trillion, saying that the move to cloud technology and pent-up demand to replace old servers, storage and network gear are laying a good foundation for IT spending.

The bad news is that competition is as tough as ever. The combined risk of competition in the tech sector and pricing pressures is -- as it has been for a number of years -- at the top of the list of most frequently named risks in tech companies' U.S. Securities and Exchange Commission filings, according to the 2014 BDO Technology RiskFactor Report, issued earlier this month. The report analyzes the most recent SEC 10-K filings of the 100 largest publicly traded technology companies in the U.S.

Concerns about U.S. regulations and general economic conditions in the country rank number two and three on the list, noted in 98 percent and 95 percent of SEC filings, respectively. Those concerns have been number two or three on the list since 2011.

Worries about "management of current and future M&A and divestitures" however, have steadily climbed in the ranking, and are mentioned in 94 percent of the flings examined by the most recent BDO survey.

M&A is fueled by a variety of factors, including the need to fill gaps in a product line and to acquire talent, Jamil said. Case in point: just this week Apple, despite being a leading music purveyor with iTunes, confirmed it will buy Beats Electronics in a $3 billion deal to help it stay on top in the rapidly evolving music business.

"Failure to develop or market new products and services" was listed by 84 percent of the tech SEC filings, according to the BDO report. Meanwhile, "labor concerns" were cited in 83 percent of the filings and "ability to attract or retain key personnel" was listed in 81 percent of the filings.

There is little doubt that competitive pressures cited by tech companies in the filings have increased their appetites for growth through acquisition. In the U.S. alone, the value of tech deals that closed in the first quarter (and whose price was disclosed) was up 113 percent year over year to $22.6 billion, according to PricewaterhouseCoopers.

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Marc Ferranti

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