Number and value of tech mergers is on the upswing

Updated 10m ago
By Jon Swartz, USA TODAY

SAN FRANCISCO — After a recession-induced lull, the tech industry is back playing a familiar game: Let's Make A Deal.

Just last week, SAP plunked down $5.8 billion on database maker Sybase in the biggest tech deal of the year. A recent flurry of wheeling-and-dealing included IBM, which gobbled up Cast Iron Systems to bolster its standingin Internet-based computing. Apple nabbed Siri, maker of a voice-recognition application, and Intrinsity, a chip designer. Hewlett-Packard snapped up Palm for $1.2 billion. And Salesforce.com acquired Jigsaw, maker of a Web-based business address book, for $142 million.

In this season of mergers and acquisitions, there are bargains aplenty. And many start-ups — especially in hot markets such as mobile and cloud computing — love it.

"Being in the right space definitely makes things exciting," says Krishna Subramanian, co-founder and chief marketing officer of Mobclix, a 2-year-old start-up that does mobile advertising for apps. It's been approached by a handful of would-be buyers in the past six months, he says.

Milo.com, a 2-year-old local-shopping search service, has been approached by several potential acquirers the past four months, and by about 40 venture capitalists about possible investments, says Jack Abraham, its founder and CEO. Venture capital "and M&A drive each other," he says.

Through the first quarter of 2010, the number of tech mergers and acquisitions announced globally swelled to 628, from 405in the same period a year ago. The average value of deals in which the purchase price was disclosed also mushroomed, to $68 million from $44 million, says Ernst & Young. Acquisitions "really matter to us," Google Chief Financial Officer Patrick Pichette said in an earnings call in April. Google acquired Picnik, On2 Technologies and Aardvark in the past few months to "build on (Google's) existing focus areas and to bring new talent and new technology."

The rise in activity reflects a return to normal after a bruising recession all but killed the appetite of tech companies to make deals. Low interest rates have helped drive up tech shares, fueling the M&A frenzy.

"A year ago, it was difficult to sell your company during such a distressed economy," says Rob Fisher, a partner at PricewaterhouseCoopers' Technology Transaction Services. "Most companies shelved their M&A activities and concentrated on restructuring operations and conserving cash."

Today, Fisher says, "If you think of the top 10 companies in tech, they have nearly $250 billion in cash."

Large tech companies are sitting on mountains of cash: Cisco has nearly $40 billion in cash reserves; Microsoft, $37 billion; and Apple, $23 billion. They understand that if they don't put the money to use on deals, shareholders will start lobbying for dividends.

Not that companies have a choice. The frenetic pace of the tech industry — especially in such burgeoning areas as mobile, cloud computing and specialized search — has made it imperative that companies stay at the front edge of emerging tech or risk being left in the dust.

"The tech landscape is evolving at a fantastic pace," says Nat Burgess, president of Corum Group, a mergers-and-acquisitions advisory firm. "Small, agile companies are developing tomorrow's solutions, and M&A is the only way for big companies to keep up."

What buyers want

Tech titans aren't just filling their shopping carts with start-ups from fledgling markets such as mobile and cloud computing. Companies in localized search, such as Milo.com and Foursquare, also are creating buzz as potential acquisition targets. Foursquare drew interest from Yahoo, Facebook and Microsoft, but so far, remains independent.

Foursquare founder Dennis Crowley declined to comment.

Many deals are initiated by companies in the same industries to cement a No. 1 or No. 2 marketing position, or to extend their products and service to new countries, says John Bender, a high-tech consultant who, as an HP executive, was in charge of planning and executing its $19 billion merger with Compaq Computer.

At the same time, Chinese companies, flush with cash and mandated by their government to develop intellectual property, are expected to step up acquisitions this year.

"It definitely feels like things are heating up," says Phil Libin, CEO of Evernote, a maker of software for storing data. "Companies that cut back over the past few years now are feeling they need to catch up and acquire technology."

The Silicon Valley start-up is getting more overtures from potential acquirers — "They're willing to dance," Libin says — but is not looking to sell. Rather, it's looking to buy companies and form strategic alliances. Like the big boys, Evernote, too, is in the M&A hunt.

Buyers are paying more for small, innovative companies in high-growth areas with long-term potential, says Joe Steger, who studies tech mergers for Ernst & Young.

In March, there were 278 deals, up from 220 in March 2009, according to Corum Group. While the average size of deals more than doubled, to $274 million, the average annual revenue of the company bought dropped to $22 million from $65 million.

Plunging valuations have also made takeover targets more attractive to buyers. A year ago, for example, Palm was valued at $2 billion.

"We are seeing a return to normal," Fisher says, though not as frenzied as 2006 and 2007, when the availability of cheap credit spurred buying binges.

Ginning M&A action is an uptick in initial public stock offerings and VC investments in tech firms. This year is shaping up as the best for tech IPOs since 2007, when there were 59. Already, a dozen venture-backed tech IPOs have been filed — and venture capitalists such as Geoff Yang, a partner at Redpoint Ventures, expect more than 50.

"When you're looking to sell a company, and you have an IPO alternative, the pricing is going to be better," says Mike Kwatinetz, a general partner at Azure Capital. He says three of the companies Azure has invested in have been approached multiple times by potential buyers. Kwatinetz declined to name them.

VCs invested $4.7 billion in U.S. tech firms in the first quarter of 2010, up from $3.4 billion in the same time period a year ago, according to PricewaterhouseCoopers and the National Venture Capital Association.

"When VCs open up their checkbook after a bad economy, that is when small companies emerge and become big, like an Apple or Google," Milo's Abraham says. "They become monsters in a short time."

There also is the domino effect, when the launch of a product — Apple's iPad, for example — prompts someone else to make an acquisition to keep up. "(IPad) may have influenced HP to buy Palm," Kwatinetz says.

Intellectual capital

For years, people looked on big tech mergers as they would a high-octane Hollywood marriage: doomed to fail.

The debate escalated and spilled into a Delaware court in 2002 when Walter Hewlett, the son of HP co-founder WilliamHewlett, contested the merger of HP and Compaq. (The deal went through, and the new HP eventually emerged stronger.)

Back then, the reasoning went that tech's most valuable assets are largely intellectual. Many of those assets, in the form of people, tend to leave companies once they've merged. What's more, tech cycles move so fast, the time spent integrating two huge organizations often results in delayed products. And delayed products in a hyper-competitive industry usually open the door for competitors to swoop in and swipe customers. Complicating matters, the cultures of tech companies tend to be strong, making it tricky to meld them.

Until this decade, large-scale tech mergers were not successful, says David Yoffie, a professor at Harvard Business School. Most efforts were about plunging into new business areas, stretching resources, rather than consolidating operations and building market share, he says.

Despite a rise in tech M&A, some company boards remain wary, says consultant Bender. " 'How bad could this deal go?' is a common question," he says.

The aversion to megadeals remains largely intact — the notable exception being the deft deals of Oracle, which gobbled up major rivals such as PeopleSoft and Siebel Systems, creating a database superpower. Emboldened, Oracle bought Sun in a dramatic move to add hardware to its software portfolio and create an all-in-one tech shop.

"The future of computing is about providing customers solutions from one vendor," Oracle CEO Larry Ellison said in a phone interview.

When it closed its $7.4 billion acquisition of Sun in January, Ellison proclaimed Oracle expects to squeeze a $1.5 billion profit from Sun in the next year.

"Oracle did a remarkably good job of consolidating an industry," Yoffie says. "And HP-Compaq, it can be argued, was about consolidating, creating economies of scale."

The multibillion-dollar bets are worth it, when you consider the vast size, and opportunities, of the markets they're targeting.

IBM predicts the cloud-computing market will mushroom to $126 billion by 2012 from $47 billion in 2008.

HP, which dove into the smartphone market with its proposed purchase of Palm, foresees a $100 billion industry.

For many of tech's biggest players, acquisitions are fueling a surge in revenue, says Amy Wohl, editor of the technology blog, Amy Wohl's Opinions.

Cisco's acquisition of video-communications giant Tandberg for about $3 billion last year should account for about $200 million in revenue for its current quarter, it says.

IBM has poured $22 billion into the acquisition of nearly 100 companies — many of them smaller, innovative software firms — since 2003.

Big Blue, in turn, has wielded its global reach in 170 countries to market, sell and distribute the offerings of its acquired properties, driving up revenue, says Deborah Magid, IBM's director of strategy for software. (HP has announced a similar intent with its purchase of Palm.)

If there is any doubt about IBM's future commitment, consider this: At its annual investor meeting last week, CEO Sam Palmisano said the company will spend about $20 billion on acquisitions in the next five years.

With so much pent-up demand for acquisitions, The Dating Game is also back for another run.

"There's this feeding-frenzy effect," says Sam Altman, CEO of Loopt, a leading mobile-based location service. "After you've been starving for a long time, you're really anxious to eat."

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