Tech M.&A. Expected to Rebound After Weak Year

from dealbook.blogs.nytimes.com, December 16, 2009:
Mergers and acquisitions languished in the technology sector this year as company valuations fluctuated wildly with the economy. But with the valuation gap closing and deal activity rising, bankers and corporate executives expect 2010 to be quite a busy year as technology companies seek to raise capital, divest noncore assets and acquire rivals.
To say it has been a quiet year for technology deals would be an understatement. In the first 11 months of the year, there were only 31 technology transactions valued at $1 billion or more, which is less than half the level of the boom years from 2005-2007, according to the 451 Group, a technology investment research firm.
But M.&A. spending in the technology sector is making a comeback. Spending in the second half of the year is running 50 percent higher than the combined spending in the first two quarters. That has been driven by a number of large transactions announced since last summer that probably would have been inconceivable earlier this year, like Hewlett-Packard’s $3.1 billion acquisition of 3Com and Xerox’s deal for Affiliated Computer Services.
The year’s slowdown in deal activity stemmed mostly from the inability of buyers and sellers to agree on a price. It was hard to project future cash flows for companies during the height of the financial crisis earlier this year. Technology start-ups, for example, were being valued at 0.9 times revenue in January but were fetching about 1.4 times revenue by the fourth quarter, according to the 451 Group.
“That’s a not-insignificant increase when compared to where valuations were earlier this year,” the 451 Group said in a research report. “Put into real-world terms, a start-up that was running at $10 million in revenue that sold for $9 million in early 2009 was worth $14 million closer to the end of the year.”
In a survey of industry professionals conducted by the 451 Group, eight out of 10 investment bankers said that the valuation gap would have little or no impact on deal-making in the coming year. About two-thirds of these bankers believe that company valuations will move higher next year and that the higher prices will not deter deals.
But eight out of 10 corporate development executives said that bridging the valuation gap would remain difficult. Nevertheless, the corporate officers still believe that there would be more movement on the part of companies next year on price and that more deals should be expected.
So what kind of deals is the market likely to see? The analysts at the 451 Group believe that there will continue to be a blurring of hardware and software offerings, like in the case of Oracle’s still-pending $7.4 billion acquisition of Sun Microsystems. Companies are trying to control the entire technology value chain now from parts to programs to services, so expect more vertically integrated deals.
There also seems to be a shift in technology alliances as companies move to intergrate across the value chain. For instance, Hewlett-Packard’s $3.1 billion acquisition of 3Com in November would have been almost inconceivable if Cisco Systems hadn’t antagonized its longtime ally by introducing its own blade server a half-year earlier, the 451 Group said. More deals that cross what were sacrosanct division lines between friends should be expected.
– Cyrus Sanati