Tech mergers should stay hot in 2006
New investors, rising cash reserves and consolidation mean tech companies should find plenty of buyers.
NEW YORK (CNNMoney.com) - Mergers in the tech sector jumped last year from 2004, and investment bankers who work in the industry think that trend will continue in 2006.
The dollar amount of deals in the tech sector rose 75 percent in 2005 to $340 billion, according to a recent survey of investment bankers, and nearly nine out of 10 bankers in the sector see that number rising again in 2006, according to a survey by the technology analysis firm the 451 Group.
What made 2005 such a hot year? There was a "perfect storm" that helped to produce the boom, according to the 451 Group's Tim Miller.
Acquiring companies were flush with cash, private equity firms piled into the sector in a big way, and some maturing segments of the tech industry proved ripe for consolidation -- all factors that will continue to play a role in 2006, experts say.
Last year's high-profile deals included Cisco Systems (up $0.10 to $19.80, Research) agreeing to buy Scientific Atlanta (unchanged at $42.82, Research), Oracle (down $0.03 to $12.37, Research) buying software maker Siebel, eBay (up $0.34 to $40.34, Research) buying private Swedish Internet phone company Skype and a group of private equity firms led by Silver Lake buying Sungard, which was one of the biggest leveraged buyouts in history.
So far this year, 470 deals totaling $15.5 billion have been announced, according to M&A tracking firm Dealogic.
What's in the pipeline
Mike Huffman, the national director of technology, media and telecom M&A at consulting firm Deloitte, said that unlike the merger activity back in the "bubble days" of the late 1990s, today's takeover targets tend to have slow to moderate growth rates and often have strong cash flows.
"You are dealing with a market that is a lot different today than it was when everything was go, go, go," he said. "Today, younger companies are getting bought out earlier, more established companies are combining, and there are some areas where there's a big land grab going on, such as the Internet."
In a recent survey of senior investment bankers who work on transactions in the tech sector, 87 percent said they expect M&A activity to increase this year, according to the 451 Group.
Nearly half the 125 bankers surveyed reported that the number of deals in the works has grown 25 percent or more compared to the same period last year. About two-thirds of the respondents said their firms plan to hire new employees just to handle the growth in tech M&A this year.
The increased willingness of established companies to go private the wake of Sarbanes-Oxley's tougher regulatory environment, coupled with the rising coffers of private investors, has also boosted buyout activity.
Huffman said that many of the target companies not only have strong cash flow but little debt -- meaning private equity companies can take them private and borrow heavily in a bid to boost returns for the funds' investors. That scenario can be appealing to target companies as well.
"You have management (at some companies) getting tired of dealing with Wall Street (who) see this as an opportunity to run a business out from under the Street," said Huffman, referring to some public companies that go private. "You'd think this would happen with lower level public companies, and it is, but then you also see deals like Sungard."
Internet, storage, security firms hot
The bankers think the sectors that saw the biggest growth in mergers last year – the Internet, mobile software and tech services – will also show the fastest growing M&A activity this year. M&A spending on mobile software, which is installed on hand-held devices, soared about 140 percent last year, while spending on mergers in the Internet sector jumped 150 percent. The dollar value of tech services deals grew 160 percent.
The 451 Group's Miller said he thinks that the systems and storage businesses will yield a lot of deals, particularly for makers of storage network hardware, which companies use to store and share data across networks. He also cited companies making ID and access management products as potentially attractive targets.
In the Internet sector, social networking sites and companies centered around user-generated content will continue to be attractive to investors -- as they were in 2005, when News Corp. (Research) bought social networking site MySpace.com and Yahoo! (up $0.26 to $32.98, Research) snapped up companies such as photo sharing web site Flickr and "social bookmarks manager" Del.icio.us, which lets users save and share their favorite Web sites in a central location.
Just yesterday, Google (down $1.17 to $342.15, Research) announced it acquired Measure Map, which compiles Internet statistics for bloggers. The company's product is still in beta. The 451 Group's Miller calls these "early-early'-stage" acquisitions "cradle-robbing" deals and says they are becoming increasingly common from the likes of Google and Yahoo (Research)!.
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