Look who's up for grabs in tech
Mergers and acquisitions are expected to increase this year. Here are some Internet and software companies that may head to the altar.
By Amanda Cantrell, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Technology mergers and acquisitions jumped in a big way last year, and that boom is expected to continue in 2006.

Two sub-sectors will prove to be particularly hot targets: software and Internet companies. So-called "Web 2.0" destinations, or sites that allow users to interact with each other and generate their own content, will look especially good to buyers, as will specialized e-commerce sites, experts say.

Last year roughly $340 billion in deals got done, a 75 percent increase over 2004 levels, thanks to a "perfect storm" of factors that led to fertile ground for tech M&A: acquiring companies were flush with cash, private equity firms piled into the sector, and some maturing segments of the tech industry proved ripe for consolidation.

That combination of factors will bear fruit again in 2006, according to a survey by the technology analysis firm The 451 Group. Attractive target companies will fall into two categories: established companies with solid fundamentals but slowing growth, and new, unproven companies with strong growth potential.

Here's my profile - now buy my T-shirt

Of the "Web 2.0" companies, social networking sites will continue to generate interest, as they did last year, when Newscorp bought Myspace.com and Yahoo! bought photo sharing Web site Flickr and bookmark-sharing Web site Del.icio.us.

Social networking companies such as Linked In and Plaxo -- which help manage huge networks of people and allow users to keep their contacts current -- fit the bill, according to Brian Skiba, managing director at Arma Partners, an investment banking firm that focuses on technology companies. So do social communities such as video sharing Web site YouTube, which counts venture capital firm Sequoia Capital as an investor, as does Linked In.

"Historically, VCs would fund a company and exit within a five to eight-year window, and try to IPO a company like that," said Skiba. "I don't know whether there is an appetite today for an IPO of an Internet company other than Google, so literally every venture-backed company is for sale."

Rikk Carey, executive VP of engineering for Plaxo, insisted his company isn't for sale, despite the chatter. (Linked In did not return a call for comment by press time.)

"We don't think about getting acquired, we think about building our user base and going public," said Carey. "VC investors are not the guys who look to build small companies and flip them."

YouTube spokeswoman Julie Supan said the company can't comment on speculation, but she noted that its founders were early employees of PayPal -- which was eventually acquired by eBay.

"If you look at PayPal, that's a good indicator of their mind set," said Zupan, who noted that YouTube went from streaming three million videos per day in December to 20 million a day now. "The reality is we are building a long-term, viable company."

Tricia Salinero, managing director for Newforth Partners, an investment banking and advisory firm that handles technology transactions, also mentioned Shutterfly, another digital photo sharing and printing service, as a potential target.

Jeffrey Housenbold, Shutterfly's chief executive, said the company is happy being independent -- and profitable -- but he realizes his company is appealing as a target.

"There's no pressure from our investors to liquidate, we have lots of cash in the bank, it's rapidly growing and profitable," said Housenbold. "But I have a responsibility to listen to any fair offer that's out there. It's not something I'm spending a lot of time on, but certainly we'll take the appropriate meetings and conversations as they come."

While many such companies exist, there will ultimately be just a handful of social networking sites that emerge victorious, according to Brian Bean, co-head of investment banking for Montgomery & Co., an M&A investment banking firm.

"You won't have 20 different Flickrs and Del.icio.us-es," said Bean. "Once they get scale, that's it. They become the Microsoft of their space."

E-commerce companies are also hot targets. One of the older, more established players that Salinero and others cite is Café Press, which lets users put their own logos on merchandise ranging from hats to mugs to underwear. Café Press bills itself as a "profitable, private company" on its Web site. A spokesperson for the company said it is not focused on being acquired right now, saying, "Our main focus is on building a stronger business." But people in the business cited it as a good example of the type of e-commerce company that acquirers will want to buy.

"They have millions of subscribers with millions of products that people are buying," said Skiba.

Salinero calls this brand of e-commerce "mass personalization" and said it is a way to monetize the "digital square footage" of social networking sites.

"Here's everything you need to know about me, and buy my t-shirt," as Salinero puts it.

Both Skiba and Salinero said potential buyers of such e-commerce sites could include established e-tailers like Amazon.com (Research), but more likely would comprise Internet consolidators such as Barry Diller's IAC/InterActiveCorp (Research), which most recently acquired search site Ask Jeeves and includes Internet companies such as Expedia.com (Research) in its portfolio.

A handful of e-tailers you may have heard of fall into the "small but growing" category, according to a CNNMoney.com stock screen. Online jeweler Blue Nile (down $0.50 to $30.60, Research) has a $561 million market cap but boasts a long-term future growth rate of 26 percent.

1-800-Flowers.com (down $0.04 to $6.40, Research) has a market cap of $432 million but is expected to grow at 25 percent a year. Skiba said that in the case of 1-800-Flowers, it would more likely be acquired by an Internet consolidator than a retailer.

Salinero concurred. "I think IAC is going to be on the acquisition trail, and I can see them looking at companies like Café Press, Shutterfly, 1-800-Flowers," she said. "It makes total sense for them to say, 'I've aggregated this talent, I can monetize my digital square footage and keep the synergy for these companies going."

Software makers due to pair up

On the software front, Salinero said she thinks Salesforce.com (down $0.06 to $34.76, Research), which makes "CRM" software that helps large businesses manage customer support functions, is a hot target.

"With a trailing 13 multiple, they need to do a deal this year," she said. "I think Salesforce is going to see some pressure from Sugar CRM (a competitor)," she said. "I'd love to see an Intuit-Salesforce merger, but that's wishful thinking given what the multiples are right now."

A spokesman for SalesForce.com said the company does not comment on speculation.

On the stable-but-slowing growth front, CNNMoney.com's stock screen also turned up Progress Software (down $0.11 to $28.61, Research), which makes business application software and provides related services.

Skiba noted that Progress has been making some acquisitions of its own lately, but that doesn't necessarily rule out consolidation, in part because it's a good example of a mature software company with good cash flow and an established "install base" of customers.

"They are a ground zero target mature, profitable software companies with strong balance sheet and install base so they maybe a candidate for consolidation or private equity (acquisition)," he said.

"They are also going to be a buyer," in the near term, said Salinero. "It'd be interesting if they ended up going the way of so many companies and intoOracle's (down $0.05 to $12.39, Research) nest."


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