Tech deals heat up: Will Twitter be next?

M&A activity was down 85% in the first quarter, but some analysts say that may have signaled the bottom.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Merger activity in the tech sector has dropped precipitously from a year earlier, but the landscape is quickly changing as confidence returns.

M&A activity in the first three months of the year plunged 85% from a year earlier, with only 625 deals worth $8 billion completed, according to tech research firm 451 Group. The first quarter of 2008 saw 835 deals worth $55.2 billion inked.

"The overall uncertainty and lack of credit to do a deal has factored into lower M&A numbers [in 2009]," said Phil Hochmuth, analyst with Yankee Group.

But all that is changing. Two big acquisitions in April blew past the total value of M&A activity in the entire first quarter of 2009: Oracle's purchase of Sun Microsystems was valued at $7.4 billion, and Fidelity National Information Services scooped up Metavante Technologies in a deal worth $3 billion.

Other factors at play. Credit has loosened up, tech shares have remained under pressure, making companies look more attractive, and consumer confidence has started to improve. "A lot of tech companies are still feeling their way around as we go through the aftershock of what's going on financially," said Hochmuth.

Some big tech firms reported less-than-stellar quarterly results recently, but there were pockets of optimism.

"Tech earnings weren't horrible, and there's been a nice run in the Nasdaq," said Brenon Daly, M&A analyst at 451 Group. "Companies are feeling more bullish, and they're loosening the purse strings. A lot of that will flow into M&A."

While there may still be a few multi-billion dollar deals out there, Daly expects more pacts to surface between lesser-known smaller companies that currently take in more revenue than they are worth on the stock market.

In April, Rackable (RACK), which makes server and storage products for data centers and has a market capitalization of just $162 million, snapped up Silicon Graphics out of bankruptcy for $25 million in cash.

"When you have two companies trapped below a ceiling, what's the risk?" Daly said.

Big names to watch

While analysts expect much of the flurry of activity to be centered around smaller firms, there are some vulnerable big names.

"Companies with a lot of cash are going to want to take advantage of the downturn and grab market share by moving into new markets," said Hochmuth.

Here are some of the names that analysts are talking about:

Nortel: Nortel, the telecommunications manufacturer that went bankrupt in January, has long been at the top of analysts' takeover target list. The company has just two remaining core units: carrier services, which sell routers to telecom companies and its optical unit, which sells information transmission products.

Many of those units' products are top-of-the-line, say analysts but companies are skittish about doing business with a bankrupt company, especially one that took in more than $2 billion in revenue last year but now has a market cap of less than $100 million. But that's exactly what makes the company attractive to a bigger rival with cash to spend.

"Nortel has technology that could be useful to a competitor," said Hochmuth. "It has a lot of tech assets and business lines that could be made profitable, even though the company is in bankruptcy."

A Nortel spokesman said the company continues to pursue opportunities "that we believe will provide maximum benefit to our key stakeholders, including our creditors, customers and employees."

Twitter: In the fast-growing social networking world, Twitter has created a lot of takeover buzz. Rumors continue to abound that Microsoft (MSFT, Fortune 500) or Google (GOOG, Fortune 500) are interested in acquiring the company.

"It makes sense that Google and Microsoft are talking to Twitter," said Caroline Dangson, analyst with IDC. "Microblogging is definitely an important trend, and both companies would like to gain greater outreach."

Dangson said Twitter may try to hold out until it can get a better price, but making money by selling ads is proving to be a difficult task in this economic environment. If Twitter can't turn a profit, it may be forced to sell sooner rather than later, say analysts.

The company was unavailable for immediate comment.

Sun's server business: After Oracle (ORCL, Fortune 500) scooped up Sun Microsystems (JAVA, Fortune 500) last month, analysts were talking about what a great match Sun's software business will be for Oracle and what a lousy match Sun's server business will be.

"It certainly would be a surprising move for Oracle to choose to get into hardware business," said Andrew Bartels, analyst with Forrester Research. "It would be especially surprising because Sun is in the server business, which is not doing terribly well right now."

Many analysts believe that Oracle will look to unload Sun's hardware unit, but suitors may be few in number. IBM (IBM, Fortune 500), which offered $7 billion for Sun, coveted the company for its software business, not hardware. But Hewlett-Packard (HPQ, Fortune 500) and Cisco (CSCO, Fortune 500) are names that have come up as possible acquirers should Oracle put part of Sun on the block.

Oracle was unavailable for immediate comment.

Red Hat: Red Hat (RHT), which markets open-source software including the operating system Linux, had often been named as a likely acquisition for Oracle before the Sun deal. Still, analysts say the company remains primed for a takeover. Red Hat declined to comment.

"I can still see Red Hat going to Oracle or another software vendor that wants a cooperating system," said Hochmuth.  To top of page

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