After a glacially slow start to 2009 in the mergers and acquisitions market, tech companies started buying again in the second half of the year and analysts expect the resurgence in takeover activity to continue in 2010.
Tech M&A activity in the United States hit lows of $3.1 billion in the first quarter and $2.3 billion in the second quarter of this year, as measured by value of closed deals. Those numbers were a far cry from the $13.8 billion posted in the second quarter of 2008 and the $44.6 billion in the third quarter of 2008, according to a report by PricewaterhouseCoopers.
But the industry is starting to rebound with $9.8 billion worth of closed deals in the third quarter of 2009. Future M&A activity is always hard to predict, but the trends are going in the right direction, analysts say.
"If you look at the first two quarters of the year it was almost at decade lows, which is pretty meaningful if you consider what else happened this decade" with the dot-com bubble bursting, says Rob Fisher, leader of PwC's tech M&A services group. "What we saw was basically the deal volumes doubled in Q3 compared to Q2 and actually basically doubled the year to date stats. Given the announcements we've seen over the last few months it's our expectation we will see another doubling."
Billion-dollar deals made a comeback in the third quarter of this year with announcements such as Xerox's $6.5 billion purchase of Affiliated Computer Services and Dell's planned acquisition of Perot Systems for $3.9 billion.
Dell's acquisition of Perot closed in the fourth quarter and Xerox-ACS is still pending and so they are not included in the third-quarter figure. Another pending deal that could boost the stats is Oracle's $7.4 billion purchase of Sun, which is being reviewed by European regulators.
A shortage of M&A activity as well as a slowdown in the IPO market has made it difficult for new technology companies to secure venture capital funding, because investors are wary of putting money into new companies when they haven't received liquidity on prior investments. Michael Fitzgerald, founder and managing general partner of Commonwealth Capital Ventures in Massachusetts, has predicted that the venture capital industry will continue to shrink dramatically over the next three to five years.
But as long as the stock market doesn't crash again, the tech industry should see healthy levels of acquisitions and IPOs in 2010, says Robert Armstrong, a financial analyst and senior columnist at Dow Jones Investment Banker.
"There's been a pretty torrid pace of tech deals in the second half of 2009," Armstrong says. "Even if the stock market can just bumble along where it is, I think M&A will continue apace."
As the market stabilizes, it's easier to determine a fair price for an acquisition, Fitzgerald says.
"2009 was kind of an odd year because the macroeconomic environment was so uncertain," Fitzgerald says. "The uncertainty and instability is always a problem when you think about making big decisions about mergers and acquisitions. A degree of stability next year should definitely help."
Many small start-ups that were nearly ready for an IPO but did not go public because of economic conditions are likely to take the plunge in the first half of 2010, according to Armstrong. This in turn will drive further M&A activity as big companies go for takeovers to pre-empt the IPOs, he says.
One of the next logical questions is which types of tech companies will do the buying in 2010, and what types of companies will they take over.
Facebook, Twitter and LinkedIn are potentially hot properties in the social networking industry. Creating financial value in Facebook and Twitter will be a challenge, however, and therefore the list of companies willing to shell out big bucks for the sites is limited, Armstrong said. Armstrong believes LinkedIn may have more value to potential acquirers because the site is built around a quite significant type of transaction – the hiring of new employees.
"Paying a billion or so dollars for Twitter would just be madness," Armstrong says.
In the enterprise market, Xerox-ACS, Dell-Perot and HP-EDS are examples of big tech vendors buying services firms, part of a trend in which IT vendors are seeking to become one-stop-shopping destinations. Oracle, a software company, is attempting to buy Sun, a hardware company, and HP is trying to become more like Cisco by purchasing switch and router vendor 3Com.
The convergence of historically segregated markets like networking, storage and server technologies, and convergence of hardware with software and services, is likely to trigger further acquisitions, Fisher says. Customers are demanding better pricing and vendor and product consolidation, putting the squeeze on pure-play vendors competing against larger, diversified product and service providers, he says.
Trying to predict unpredictable events like mergers and acquisitions "is a great way to make yourself look stupid," Armstrong says, noting that analyst forecasts often turn out to be wrong. Many of the big vendors don't have an obvious need for a giant transaction along the lines of Oracle-Sun, so it's hard to say which companies are likely to pull off a blockbuster deal, he said."Does Cisco need to buy anything now? No. Does HP? No. Does IBM? No. They might be opportunistic and snap up something small, but they all have big, complete portfolios. There's nothing that screams out 'how can they compete without X'?" Armstrong says.
Still, there are interesting cases like Juniper. Many of Juniper's investors would likely be happy if Cisco bought the company, but assuming that doesn't happen perhaps Juniper would bulk up itself by taking over competitors Riverbed, F5 or Blue Coat, he says.
More broadly, interest in healthcare IT and the desire of tech companies to expand market presence in China are factors likely to create more M&A activity, Armstrong says.
Ultimately, the downturn in 2009 will just be seen as a temporary interruption of a longer-term trend toward industry consolidation through mergers and acquisitions, Fisher says.
"Our perspective is this is basically the continuation of what's been a five-year trend in which the technology industry in general, which is consolidation," he says. "We view that as having been interrupted by the recession. At least in the last two quarters, that consolidation wave has reignited and we're seeing increases in activity and overall deal volumes and values as a result. In a broad sense, we no reason to expect that won't continue."
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This story, "Tech Mergers and Acquisitions to Grow in 2010" was originally published by Network World.