Strong corporate financials, eager venture capital, a liberal lending environment and markets in transition continue to inspire buyouts and acquisitions in the IT world, with Avaya Inc. and Palm Inc. just two of the high-profile targets this week.
The transition to new technology in telecom and the Web, in particular, opens up opportunities for vendors.
Network equipment manufacturer Avaya on Monday announced a deal for a US$8.2 billion cash buyout by private equity firms TPG Capital LLP and Silver Lake Partners.
“We are starting to see more of this kind of public-firm-going-private. We’ve seen this with Alltel most recently and cable television companies as well,” said telecom analyst Jeff Kagan in an e-mail commentary.
Last month, TPG and Goldman Sachs Group Inc.’s private equity unit bought mobile service company Alltel Corp. for $27.5 billion.
The Avaya deal will allow it to make a potentially costly transition from legacy TDM products to IP (Internet Protocol) technology, without having to worry about the quarter-to-quarter bottom line. The timing of the deal was good. Avaya shares have been doing well lately, so the buyout gives shareholders top dollar. Avaya shares rose $0.31 to close at $17.02 Tuesday.
“Avaya obtained an impressive value for shareholders,” said Morgan Keegan analyst Tavis McCourt in a research note
Private equity firm Elevation Partners’ acquisition of 25 percent of Palm also caused investors to cheer. Palm rose $1.48 to close at $17.57 Monday. Palm gets a $325 million investment and also several industry leaders: Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple Inc., as well as Apple’s former chief financial officer, Fred Anderson.
It is widely hoped that Rubinstein will be able to spark new ideas at Palm, which is suffering from competition against device makers Research In Motion Ltd. and Nokia Corp. Palm last week announced the Foleo, pitched as a mobile device “companion” product, but IT investors are waiting for more of a breakthrough device for the company’s aging product line.
In other acquisition news, Flextronics International Ltd. said Monday it will acquire Solectron Corp. for $3.6 billion. Flextronics said the deal will streamline product development and supply chain management and create an electronics manufacturing giant with more than US$30 billion in annual revenue. But Flextronics slipped $0.16 to close at $11.54 on the news. Traders sometimes dump shares of acquiring companies when deals are suspected to have a negative impact on financials. Investment firm Hilliard Lyons downgraded its rating on Flextronics from “buy” to “underperform.”
Meanwhile, telecom-equipment maker, UTStarcom Inc., dropped $0.80 to $6.51 after announcing Monday that it had done a strategic review and decided not to seek a buyout or merger.
Though new technology may bring more opportunities, it may take a while before new products and services generate significant revenue for vendors. Almost halfway through the year, moderate growth is still anticipated for global IT in 2007 and recent surveys suggest that corporate spending may be even softer than had been expected.
A survey from ChangeWave Research released last week, for example, reported that the percentage of companies planning to increase their spending has fallen to its lowest point in the last four years.
In this environment, where capital is available but market growth is slow, IT is bound to see buyouts and acquisitions continue.
