Though mergers and acquisitions overall are down sharply in the past six months and likely will remain so for some time, M&A prospects look strong in tech, according to analysts and industry reports.
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"Whether you want to build up your software and services portfolio or pick up certain technologies and expand into new product spaces, this is an opportune time to do it if you don't strain the balance sheet," said Barry Jaruzelski, a partner in the technology practice of consulting firm Booz & Co.
"We're in a buyer's market," Jaruzelski said. "The technology industry, from a balance sheet view, is in a much better situation than it was in after the tech meltdown that began in 2000."
As always, though, buyer beware.
"Because I'm looking for a size 12 shoe doesn't mean a cheap size 14 will attract me," said Brian Moriarty, vice president of corporate development at Sun Microsystems (JAVA), speaking on a panel at the AlwaysOn Venture Summit in Half Moon Bay, Calif., last month.
During the panel discussion on the M&A outlook, which was posted online, Moriarty said Sun — which some observers have called a possible takeover target itself — will be looking to buy companies that plug gaps in its portfolio. Such was the case when Sun acquired MySQL, developer of open-sourced database software, for $1 billion in January 2008.
While the economy creates opportunities, it also creates difficulties. Uncertainties about the length and depth of the recession make it hard to know if an acquisition target's revenue and earnings projections will hold up.
"That makes having a principled negotiation much more difficult," Moriarty said. "We'll be a lot more selective, partly because we can't see the future as well as we could 12 months ago."
Panelist David Lawee, vice president of corporate development at Google, (GOOG) said the search king is always looking to acquire "breakout technologies" that can lead to significant new products.
An example, he said, was Google's acquisition of software maker Android. From that acquisition, Google developed an open-source software platform for a new generation of mobile phones. Another was when Google acquired Keyhole, a software company that was the basis for Google Earth.
Google also looks to buy companies that have reached "escape velocity in complimentary markets," Lawee said. An example was Google's purchase of video site YouTube.
Google is not necessarily benefiting from the financial crisis in acquisitions, he said. Good companies in a strong market position will get a premium value no matter what.
"All the companies we bought were great companies in their segment. And you have to pay up for them," Lawee said. "So we're not really benefiting from lower valuations."
Some companies, though, are. The value of mergers and acquisitions tracked by Updata Advisors fell 50% in the third quarter to $15.3 billion compared with the second quarter. Updata tracked five tech sectors: infrastructure, enterprise application software, security, tech services and Internet.
The decline in valuation came as the number of deals rose to 202 from 194 in the second quarter.
"This is a very good time to buy companies," said Don More, a partner at Updata Advisors, an investment bank specializing in tech mergers and acquisitions. "You're not going to see assets of comparable quality at such a low price for a long time."
Acquisition activity should be brisk in tech services, especially Internet security, according to a recent survey by Updata and law firm Morrison Foerster. Also popular, the survey found, will be M&As in information systems and in processing and enterprise software.
Large tech firms such as IBM, (IBM) Hewlett-Packard, (HPQ) Microsoft (MSFT), Cisco Systems, (CSCO) Oracle (ORCL) and Google will be the main driver of M&A activity, according to the survey. Most deals will be for less than $500 million.
One deal in the third quarter was Cisco's $120 million acquisition of Pure Play, a developer of home networking products. Another was IBM's $340 million acquisition of Ilog, a maker of business management software.
"We could see some very big deals in 2009," More said.
In spite of recent acquisitions in the social networking space, such as AOL's $850 million buyout of Bebo, and Microsoft's investment in Facebook, social networking is a less attractive area for M&As in 2009, says More, until such companies start to make more money.
"But there are some signs that valuations may be nearing a bottom," More said. One, he says, is increased activity in potential hostile acquisitions. Cash-rich companies will look to strike before prices start creeping back up.
"Valuations have been knocked down more than is merited due to all the uncertainty," More said. "Now it's a question of when and how fast valuations will start to come back."
-----------------------------BY BRIAN DEAGON
Source：INVESTOR'S BUSINESS DAILY
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