Wall Street Beat: Tech M&A to Stay Strong

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Tech vendor share prices last month recovered to levels not seen since before the Wall Street crash of October 2008, but market watchers believe merger and acquisition activity in the sector will continue the current lively pace even though the value of deals will probably get steeper.

The Nasdaq Composite index closed Thursday at 2616, a new high for the year. Computer stocks on the tech-heavy Nasdaq are now up 17 percent for the year. After stumbling mid-year because of macro economic worries, the tech sector sparked a market rally starting in September.

Though concerns about unemployment and national debt in the U.S. and Europe have weighed on investors' minds, share prices for businesses in a variety of sectors have climbed over the past few months. Tech has had a lot to do with that. Tech bellwethers such as Apple, Intel and Microsoft announced record quarterly profits and sales over the last few months, and are rich in cash.

With so much cash on hand, the big tech vendors can afford to snap up smaller companies, even though deals are bound to be pricier as share valuations rise. And even as valuations of target companies rise, acquiring companies' share prices are also likely to rise, allowing for all sorts of options for stock-swap deals as well.

"After rebounding in late 2009, technology M&A volumes and aggregate values sustained upward momentum throughout 2010 with growth in virtually all key sectors and overall for financial and strategic buyers," according to a report released Thursday by market research firm PwC. "Economic optimism, strong liquidity, technology shifts, sector consolidation and acquired innovation will continue to drive growth in technology M&A."

A short list of some of the big deals announced so far this year includes Intel's purchase of McAfee for US$7.68 billion[b]; HP's $1.5 billion [b] purchase of security vendor ArcSight and its $2.35 billion [b] deal for 3Par; and IBM's $1.7 billion[b] acquisition of Netezza.

The driving force behind acquisitions is changing as the economy continues to stabilize.

"For the past 18 to 24 months, companies focused their deal making strategies on synergies to improve cost structures to withstand the challenging economic environment," said Martyn Curragh[cq], U.S. Transaction Services Leader at market research firm PwC, in a report released Thursday. "Backed by stronger credit and equity markets going into 2011, corporates have shifted their transaction focus from a mindset of recovery to strategic growth, to generate additional revenues."

This could be especially true in the tech arena. Just Thursday morning, Dell announced it is in "advanced" talks to buy storage vendor Compellent Technologies in a deal calling for Dell to pay a total of about $876 million[m]. If successful, the purchase is something of a consolation prize: Dell had tried to buy 3Par but was outbid by HP.

While deal volume was flat for the 12 months ended November 2010 compared to 2009, total U.S. deal value increased 9 percent to $786 billion [b]from $722 billion[b], with tech generating $81 billion[b] in M&A value, according to data from Thomson Reuters and PwC. Tech captured 12 percent of the deal volume, edged out by the industrial products category, which had 13 percent of deal value, and energy and power, which generated 25 percent of deal volume.

The trend in tech will continue as market leaders offer one-stop shopping for corporate customers. "The decade long enterprise technology landscape will continue to consolidate around a handful of end-to-end hardware, networking, software and services companies which will also look to acquire technologies to differentiate or fill gaps in their cloud offerings," PwC said in its report.

It's not just big companies that are merging, PwC notes. Large vendors will scoop up smaller players to get a jump on up-and-coming technology. This week, for example, middleware developer Tibco got into the business application market with its buy of CRM (customer relationship management) maker Loyalty Lab for $23 million[m], and Salesforce.com said it will acquire Heroku, which specializes in hosting applications based on the Ruby programming language, for $212 million.[m]

Next year, according to PwC, expect acquisitions involving devices, services and media oriented around mobile consumers and business users, while Internet companies look to expand local-service offerings.

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