High-tech acquisitions to be all the rage in next 12 months

It wouldn’t be hard to say that merger and acquisitions are running hot right now what with SAP’s $6.8 billion  Business Objects buy and Oracle’s $6.7 billion try for BEA Systems. And Cisco naturally is in the hunt for a couple  companies – one wireless and one for voice recognition. 

It’s a pattern IT consumers should get used to for the coming year, says a study released by the 451 Group today that says  85% of what it calls “strategic acquirers” say they will increase or maintain current levels of M&A activity in the coming 12 months. Companies buying other firms spent nearly $156 billion to acquire technology companies so far this year, a nearly 80% increase from the $87 billion they spent in the same period in 2006, 451 said.  In the past six weeks buys have accelerated: total spending by strategic buyers shot up to $32 billion, about two-and-half times the $12.6bn spent in the period between September 1 and October 15 last year. 

The study cites a number of reasons that trend to increase, including:

   ·          Healthy buyer balance sheets. Thanks in part to maturing product lines that generate healthy cash flow and in part to thorough financial housecleaning that took place after the dot-com bust of the early 2000s, many large acquirers have little debt and are awash in cash.  The companies responding to this survey collectively boast more than $60 billion in cash and equivalents on their balance sheets, even after spending a combined total of more than $7 billion to acquire companies so far in 2007.

·          A large inventory of venture-backed companies. The supply side of the market is well stocked with privately held companies ripe for exit. According to Growthink Research, there are more than 1,800 VC-backed companies in the US alone that are four years old or older. Many of these, given their relatively mature age in VC funding years, are ripe for an IPO or other liquidity event.

·          Consolidation is far from complete. Although there has been a great deal of consolidation, some sectors such as infrastructure software have a way to go. Less than 10% of the respondents said they expect their acquisition volume to decline.

·          Need to make up for R&D deficits. In cleaning up their post-bubble financials, a number of companies pulled back from investing in research and development. Innovation also has suffered to some extent during the rounds of consolidation that have been taking place in the industry. Some buyers are buying to make up for internal building they didn't do in the past. Survey respondents mentioned mobile infrastructure, security and technology related to software as a service and service-oriented architecture as areas ripe for acquisition.  

While some would doubt the finding, the 451 group states that at least part of the reason for the bullish attitude among corporate acquirers is their perception that they have to deal with less competition from private equity firms in the coming year. About half of survey respondents say the debt shakeout will increase opportunities for strategic buyers, and nearly 45% of them expect to see fewer buyout firms competing on deals. 

Private equity firms have been busy in the past year and there’s no obvious reason they won’t remain that way.  3Com was the most recent example of a private equity buy as it was bought by Huawei and Bain Capital in a deal worth over $2 billion.  Avaya was bought earlier this year by Silver Lake Partners and the Texas Pacific Group for $8.2 billion. In fact an article in the New York Times this summer said  that investors at UBS have built a model for looking at hypothetical leveraged buyouts of technology companies and ranks potential targets by how profitable they might be. 

The model says that any company that would bring a return of 20% or more to a private equity buyer could be a buyout candidate. UBS says 57 technology companies would currently fit its bill. The top 10 companies on UBS’s list in June included: Unisys, Bearingpoint, Tibco McAfee, Symantec, and BEA Systems.

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Copyright © 2007 IDG Communications, Inc.