Shareholders of engineering simulation software maker Ansys Inc. NASDAQ: ANSS got a holiday gift as the stock rallied more than 18% on December 22 on news that Synopsys Inc. NASDAQ: SNPS was in discussions to acquire the company.
According to a report from Bloomberg and the Wall Street Journal, semiconductor design software maker Synopsys has offered to buy Ansys. The companies have not commented publicly on the rumor.
Synopsys, with a market capitalization of $79.71 billion, is a component of the S&P 500, as is the $31.10 billion Ansys. Both technology stocks are tracked in the Technology Select Sector SPDR Fund NYSEARCA: XLK.
Why stocks of acquiring companies fall
Synopsis stock fell 6.34% on December 22 on news of the acquisition talks. That’s not unusual. Stocks of acquiring companies often fall because investors may fret about overpaying, or whether the acquiring company may be stretching its finances too thin. Investors also don’t like the idea of diluting existing shares.
Synopsys shares declined again on December 26, but easily found support at their 50-day moving average, a sign that the selling may be muted from here on.
Uncertainty about the deal's success and its impact on the acquirer's future performance can also lead to a quick price decline.
Synopsys has been a 2023 success story, though. Shares are up 63.02% this year. You can guess the reason: The company has been developing a suite of AI-driven electronic design automation. According to Synopsys, “the primary providers of this service are semiconductor foundries, or fabs.”
Providing software for wide range of industries
Ansys develops engineering simulation software and services. In filings, the company said its software is “widely used by engineers, designers, researchers and students in verticals including academia, technology, aerospace and defense, automotive, energy, industrial equipment, materials and chemicals, consumer products, healthcare and construction.”
A look at the Ansys chart shows the stock clearing a five-month consolidation with a buy point north of $351.23. The stock added to its gains on December 26, in heavy trading volume, unusual for a holiday week, but with potential acquisition news, investors come alive.
Small engineering software maker Altair Engineering Inc. NASDAQ: ALTR moved up in tandem with Ansys, with investors believing it, too, may be an acquisition target.
Altair stock was up 11.48% on December 22, and added to those gains on December 26.
Initiated coverage with "overweight" rating
Altair Engineering analyst forecasts show JPMorgan Chase initiated coverage with a rating of “overweight” and a price target of $86, an upside of 15%.
Altair, Ansys and Synopsys are all tracked within the same software design industry group.
Ansys and Synopsys have a track record of collaboration, and are familiar with each other. For example, in 2017 they partnered to integrate the two companies’ technologies.
If the deal with Synopsys fails to go through, analysts say other potential suitors include Cadence Design Systems Inc. NASDAQ: CDNS, General Electric NYSE: GE, Autodesk Inc. NASDAQ: ADSK and Honeywell International Inc. NASDAQ: HON.
M&A resurgence in 2024?
If it seems that investors are optimistic about upcoming merger and acquisition activity, there’s good reason: After a drought of deals in 2023, analysts are expecting a resurgence in 2024.
According to a November report from S&P Global Market Intelligence, “The Big Picture: 2024 M&A Industry Outlook,” factors set to drive more M&A include interest-rate stability, pent-up demand and pushes to consolidate and divest in some industries.
However, antitrust regulators in the U.S., who have been aggressive in attempts to block some deals pertaining to techs and pharmaceutical stocks, in particular, may continue to put up roadblocks.
While S&P doesn’t expect 2024 to be a blockbuster year for M&A deals,it says companies working in the field of AI are likely to be involved in some transactions.
“Several subsectors do have the potential to see gains, including technology that offers productivity and efficiency gains, including industrial automation and decision intelligence platforms,” S&P said.
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