Market gyrations and you

Last week's roller coaster ride on Wall Street may have been bad news for investors. But it could accelerate the pace of takeovers in networking as the big guys seek to snap up some bargains.

Suddenly, small to midsize concerns are a lot more attractive to the established player - and not just because they may have the hottest new technology.

Further, many smaller firms might be more agreeable to considering an acquisition since the recent market gyrations should quiet down the market for technology IPOs. Investors may finally become more skittish when it comes to small to midsize companies in high tech. Without investors, companies might be willing to consider being acquired - especially if they still have to raise cash from somewhere to pay back their investors or buy those new Ferraris for the management team.

Packet Engines, a privately held Gigabit Ethernet start-up, is a good example. Rumors are already flying around that Packet Engines, highly dependent on venture capital and with a good potential IPO story, may opt instead for a buy-out offer from Alcatel, the French telecom supplier trying to break into the North American market. [See also Packet Engines' PowerRail to take off - a look at its first switch.]

This trend may also hold true for small to midsize publicly traded firms that are now a lot more attractive financially (as acquisition targets) than they were just a few months ago. Unlike in the past, however, look for future deals to be based more on cash than on stock swaps.

Part of this is because stock-based deals can suddenly plummet in value due to Wall Street (which is exactly what has happened recently with the Tellabs/Ciena deal). As for the notion that you could expect the target firms to also have seen their stock devalued, and thus keep a relative ratio of stock price/value, remember that most of those smaller firms in the market had already been hit on the Street over the past six months and were not significantly impacted (relatively) by the most recent market slide. Rather, the slide over the past two weeks primarily targeted the "safe money" firms at the top of the industry that had been relatively immune to the slower, gradual slide that has been occurring over the past six months.

Because of these recent market shifts, smaller companies may be more inclined to take a smaller - but guaranteed - amount of cash than agree to a stock deal whose value could crash before (or immediately after) the takeover is consummated. Remember that an acquisition with stock is roughly the equivalent of the target firm investing in the larger acquiring firm, and nobody likes to invest in a risky market (although now might be a time to find a few bargains if you can find those stocks that have been depressed ONLY by the market slide, and not by their own performance prior to the slide).

Another reason for cash deals has to do with the relative purchasing power of the acquiring firm. As the larger companies watch their own performance slow (Asia, anyone?), their own stock value will continue to head downward apart from any overall changes in the market. Reduced stock value means lower purchasing value. This will mean that this upcoming round of acquisitions may be limited to only those firms that can afford to drop a nice bundle of cash on the table (aside from a few potential market makers like Cisco, which will likely recover a bit sooner than their slower growing competition and are still viewed as good long-term investments). [See also Food-chain frenzy - More on the continuing networking shakeout from McClimans; Network World Fusion, 6/8/98.]

But what does all this mean for the people who buy networking gear? If the pace of acquisitions increases, that could make buying a start-up's offerings a bit more riskier (if A buys B, whose competing product lines do you think would be discontinued first?).

So even though you'd probably rather devote your time to networking concerns, it might pay to start paying a bit more attention to the stock market. As we've mentioned in past columns, there are several clear down sides to a volatile market. [See Investing in a start-up, in which McClimans discusses issue to consider before you do.]

Part of this attention means you should think about who might buy the small vendor whose products you're going to be buying over the next six months or so. That means making a list of companies that you think are likely purchasers of your smaller providers and determining which purchasers you would like to do business with and which purchasers you would prefer not to do business with. For each of these, be prepared to execute Plan B in the event of an unfavorable acquisition. Further, you might even want to go so far as to avoid purchasing equipment from smaller firms if you feel that most of the likely acquirers would be on your "less than acceptable" list.

For more on this topic, check out "Silicon Valley's wake-up call".

On a different note, last week I took a sarcastic view on the merger of man and computer. Inspired by that column, I had several offers of other types of man/computer mergers to avoid in the future. The best of those follow.... if you have one of your own, send it in. Perhaps we'll post it in our...

"List of Computer Implants We Can Do Without":

1. The Johnny Pneumonic 64k Memory Upgrade (especially the 9ns version)
2. The Personal Touch Pad
3. The Windows 98 "anything" Implant
4. The Internal Alert Memory Reminder Program (unless it's Y2K compliant....)
5. The Brain-3800 Memory Saver Auto-shutdown Program (not to be confused with the Flying Toasters Retina Saver)