The flurry of technology industry wheeling and dealing over the past weeks may be a precursor to more significant merger and acquisition activity, according to experts.
The flurry of technology industry wheeling and dealing over the past weeks might be a precursor to more significant merger-and-acquisition activity, according to experts.
This analysis is being stoked by deals involving the triangle of Oracle, PeopleSoft and J.D. Edwards, along with other aggressive moves launched by Mercury Interactive, Microsoft and Palm. Oracle’s $5.1 billion bid for PeopleSoft and PeopleSoft’s $1.7 billion offer for J.D. Edwards are being called not only marquee events, but also signals that it’s OK to deal if opportunities and prices are right.
“A lot of big and small public companies have stabilized and are now back in the market looking for revenue enhancements,” says Roland Van der Meer, a partner with ComVentures, a venture capital firm. “We see them putting out feelers.”
The biggest factor of all, experts say, is that IT budgets are starting to steady and companies are crafting plans for strategic spending, which lets vendors follow the money.
“IT budgets are stabilizing and the revenue pipeline is more identifiable as vendors see what companies need,” says Tony Aquilina, a principal at Stonebridge Technology Associates, an investment banking firm. “Vendors can see out nine, 12, 15 months to where revenues will come from. Just recently, companies like Cisco couldn’t see out a month.”
So far this year, there have been 530 deals involving hardware and software vendors, with 190 of those disclosing terms for a total of $18.4 billion, according to research firm FactSet Mergerstat. That pace is behind last year’s 624 completed deals by the end of May, although the total valuation for those deals was only $11.1 billion for 246 of the acquired companies that disclosed pricing.
The heightened activity might not completely manifest itself in deals for another 12 to 18 months, especially as companies focus on due diligence in evaluating target companies in the wake of corporate financial scandals and the Sarbanes-Oxley Act.
But factors are converging that make an increase in acquisitions more likely, especially in crowded markets such as security, storage, wireless, management and network hardware.
Many large vendors are looking to devise new strategies, plug holes in product lines or broaden portfolios.
The likes of Cisco, EMC, IBM, Microsoft and Symantec are seeing their stock prices hover around 52-week highs, and they have cash reserves, both of which boost purchasing power. And these vendors have established distribution channels needed by smaller companies that find it difficult to penetrate corporate IT.
Also, small and private companies are getting products into the market and building revenue, which makes them attractive to suitors that want to know profits will come quickly after deals are finalized.
Security software is one area where there has been action, and things could get hotter.
“The large security companies are looking to broaden their platforms,” says Gus Tai, a partner at venture capital company Trinity Partners. “Customers want to deal with fewer vendors.”
In April, Network Associates gained intrusion-detection capabilities by paying $120 million for Entercept Security and $100 million for IntruVert Networks.
In January, Cisco bought intrusion-detection vendor Okena for $154 million after paying $12 million in November for Psionic Software, which also developed intrusion-detection software.
“Consolidation is sorely needed in security because there is too much overlap in the technology,” says Pete Lindstrom, an analyst with Spire Security.
Gartner says firewalls and intrusion detection will consolidate into one market by 2006, with small companies such as NetScreen Technologies, which already has begun to consolidate the two technologies, leading the way.
Many technologies in the “security ecosystem,” as Lindstrom calls it, could be consolidated under various headings such as vulnerability management and threat management. Those technologies include policy enforcement; intrusion prevention; spam and content filters; patch and configuration management; and antivirus software.
Microsoft last week bought antivirus vendor GeCAD Software and plans to use the technology in its security products. Lindstrom also says don’t rule out Computer Associates or IBM making purchases, or cash-flush security vendors such as NetIQ, Symantec or even historically stingy Check Point.
Network equipment also could see a surge in action. Three big acquisitions this year point to consolidation in the edge router area as vendors migrate customers from circuit-based to packet-based infrastructures.
In May, Alcatel acquired TiMetra Networks, a privately held maker of edge routers, for $150 million. The previous month, Tellabs acquired edge switch maker Vivace Networks for $135 million and Ciena grabbed privately held multiservice edge switch maker WaveSmith Networks for $158 million.
“Vendors found themselves exposed in this area; they didn’t have product or weren’t competing in the edge switch/router market,” says Pete Wagner, co-managing partner at venture capital firm Accel Partners, which had an investment in TiMetra.
In addition, rumors are rife that the Fiber to the Premises specification, which is designed to lower the cost of stringing fiber-based broadband to the home, could touch off a round of consolidation as carriers ask large network equipment vendors to support the service. Alcatel, Cisco, Lucent and Nortel could be looking to snap up small makers of passive optical networking (PON) gear. The chatter earlier this month at SuperComm was that Lucent was courting Quantum Bridge Communications, which would only say it is in discussions with several companies. Other PON vendors include FlexLight Networks, Paceon, Salira Optical Network Systems and TeraWave.
Storage is another area perhaps poised for consolidation, where persistent acquisition rumors dog EMC and Legato Systems, in particular. Last year’s run by vendors such as Broadcom, Cisco, EMC, IBM and Veritas Software to acquire storage resource management start-ups could be followed by interest in the new hot technology – time-based backup and recovery – and vendors such as FilesX, Revivio, StorageTek, TimeSpring and Vyant.
Rich Napolitano, vice president of the data services platform group for Sun, which acquired his former company, Pirus Networks, last September, says those start-ups will face what every newcomer faces: “Nobody is going to buy anything from a start-up right now with dubious potential for additional fundraising.”
The wireless industry could face the same challenge.
“Wireless is seeing a healthy amount of low-value transactions, those below $50 million. The higher-value deals will take time,” says Rajeev Chand, senior equity analyst for wireless at investment bank Rutberg and Co. Cisco has made the largest wireless deal this year, acquiring Linksys in March for $500 million.
“If you are a public company, now is a great time to buy because a lot of private companies have technology, they have revenue, but they are struggling to get funding,” Chand says.
Another active area is software designed to manage corporate data centers. IBM, Microsoft, Sun and Veritas have made recent acquisitions to bolster their moves into utility computing platforms.
“There are vendors here with a lot at stake because they think [utility computing] is strategic to their business,” Accel’s Wagner says. “Controlling the enterprise data center, from a software infrastructure point of view, is a big deal.”
“Deal” could be the operative word over the course of the next 18 months.
“There are a lot of dynamics at work here,” says Lenley Hansarling, group vice president of product management for J.D. Edwards. He says his company entered into a deal with PeopleSoft because it saw consolidation coming and wanted to be a first mover to best position itself. “It looks like we might be at the bottom on the tech downturn, and that means companies are looking at the prospect of prices for companies going higher. There is maturation in high tech, and as an industry matures there is consolidation,” he says.
Network World staffers Deni Connor, John Cox, Denise Dubie, Jim Duffy, Tim Greene and Ellen Messmer contributed to this report.
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