City prepares for 'supersized' Aveva offer

Mergers and Acquisitions (M&A) fever has gripped the technology sector. After Microsoft/LinkedIn and Symantec/Blue Coat, French giant Schneider Electric has revived talks with Aveva over a possible merger.

A £1.3 billion bid was tabled last year before Schneider got cold feet, but the City is confident it can afford to double its offer this time round.

Much like last time, London-listed Aveva wants to join forces with Schneider's software business in a complicated deal, which involves new Aveva shares and a "significant cash payment" handed back to Aveva shareholders. Constituting a reverse takeover, Schneider will own a major stake in the combined group that will remain on the London Stock Exchange.

Having Aveva's chief executive Richard Longdon at the steering wheel will be great for Schneider, reckons Panmure Gordon analyst George O'Connor. Not only will the deal help dilute Aveva's significant 40% exposure to the oil and gas sector, but it will also help drive its performance in America and beef up its portfolio.

It's full steam ahead in the technology M&A space: Microsoft is buying LinkedIn for $26 billion (£18.4 billion) - its largest ever acquisition - and Symantec is forking out $4.7 billion for Blue Coat to boost its enterprise unit. Running out of ideas, Schneider has jumped on the bandwagon.

"M&A is so du jour in the tech sector right now. Old tech companies are getting desperate, lest they fall further behind in the new Social, Mobile, Analytics and Cloud (SMAC) world," says O'Connor.

"The pair tried and failed in the past (talks collapsed in December, some blaming the French company's larger size for a lack of focus on completing the deal) but now Schneider, clearly bereft of other ideas, has rekindled talks - well, maybe there's been a bit of a tug from Aveva shareholders thinking about that lost £10 per share."

Not plain sailing

There has been progress at Schneider. Not only has its monstrous debt burden declined from over €5 billion (£4 billion) last year to €4.6 billion, but it now has a strong cash conversion ratio of 113%. This should give it some upwards wiggle room for a takeover bid.

Talks were last axed over the additional risks and costs surrounding the integration of the merger. It was a really tricky deal to get your head around, too, and there were doubts about its value for shareholders. Aveva agreed to issue about 74 million shares to Schneider, worth £1.3 billion, with Schneider paying £550 million to Aveva.

So it's likely the last £10 deal will be "supersized" this time round, reckons O'Connor. He is confident the deal will value Aveva's shares at £22, which gives the shares nearly 20% upside.

A constituent of Interactive Investor's 2015 Summer Portfolio, investors could have pocketed a cool 39% profit if they had sold out of the software group before the pair pulled the plug on talks last December. Instead, the shares crashed 48% to 1,217p.

But they've clawed back lost ground since the beginning of February and are up 38% within a bullish trading channel to 1,691p Friday close. Before Monday's suspension the share price reached a six-month high of 1,860p - that's over 50% growth from its 2016 low of 1,221p.

In addition to shooting through its 200-day moving average, the shares jumped from their 38% Fibonacci retracement support through their 50% level.

Suspended with immediate effect, investors have to wait until either Schneider's software business releases updated financial information or Aveva says it's not considering a deal - whichever is earlier. If all goes ahead, a deal could be in the bag by the end of June, according to the Financial Times.

It's now a waiting game.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.