(Business 2.0) – In Silicon Valley, it's known in some quarters simply as "the hunger."

That's what some tech industry veterans have come to call the long season of deprivation that began three years ago with the bursting of the bubble. It has, of course, been the worst famine in tech history, starving thousands of companies of customers and capital, and it still shows only sporadic signs of relenting. Which may make it sound odd that today in the Valley and the rest of the tech world, you can hear the sharpening of carving knives and smell the pots rising to a boil. It seems there's finally going to be a feast in Techville again. Yet for many in the industry, it won't be much of a celebration. Because they'll be on the menu. ¶ The tech business is poised to enter an eat-or-be-eaten phase the likes of which it has rarely if ever experienced--a time when, at least for a while, Moore's Law may take a backseat to the law of the jungle. In IT these days, some of the hottest topics of discussion are less technological than culinary: Is Sun toast, and who might have it for breakfast? Does Apple get served up, or does it swallow someone else? Bill Gates is looking a little peckish these days, don't you think? Siebel Systems, Yahoo, Cisco--consumers or consumed?

Larry Ellison, tech's great provocateur, got much of this ferment going. The Oracle chief's headline-grabbing hostile bid for rival software maker PeopleSoft in June didn't just threaten to kill the previously announced merger between PeopleSoft and J.D. Edwards. The surprise attack, and Ellison's accompanying talk about how bloated and ripe for consolidation his industry has become, triggered a broad wave of merger speculation that has jangled nerves and forced hurried strategic reappraisals throughout Silicon Valley and beyond. Whatever the outcome of Oracle's $6.3 billion PeopleSoft offer, it has "changed the whole conversation," says tech investor Roger McNamee of Silver Lake Partners. "The software business has just become more Darwinian." Deutsche Bank software analyst Brian Skiba puts a finer point on it: "Over the next five years, the big get bigger, and the small disappear."

But it isn't only the software sector that's likely to face a convulsion. Hardware, telecommunications, and Internet companies are feeling heat to consolidate as well. Despite the brutal postbubble winnowing, there are still simply too many tech companies--more than 10,000 at last count. Ellison has said that 1,000 more tech firms must die; other insiders expect the toll to be higher. Like the railroad, telegraph, and automobile industries before them, major sectors of the tech industry are maturing and can't support so many independent companies. Add in corporations' continued sluggish tech spending and a miserable IPO outlook, and you have a recipe for a monster mergers-and-acquisitions binge.

Small signals of what could be coming appeared well before the PeopleSoft battle broke out. The best predictor of a rebound in tech M&A is the direction of the Nasdaq, and it's up nearly 50 percent since October. "People don't sit on their hands if they think prices are rising," says Alec Ellison, president of tech investment bank Broadview International (and no relation to Larry). While most M&A activity involves small-fry startups and midsize companies, the last six months alone have seen the announcement of seven merger deals of more than $500 million each. IBM paid $2.1 billion for Rational Software last winter. Barry Diller is paying $5.2 billion to complete his acquisitions of Expedia and Hotels.com so he can roll them into InterActiveCorp (formerly USA Interactive). Diller is also buying LendingTree for $734 million.

Still, the PeopleSoft fracas has concentrated the minds of tech executives in a way none of those deals could. Morgan Stanley software investment banker Andy Kearns says many of his clients are now asking themselves, "Am I next?"--and following that up quickly with a more fundamental question: "Will we end up with a few very large companies having control of many thousands of customers?" We might: As IT budgets remain tight, managers are likely to spend more of their money with the biggest, safest, and most stable suppliers. And as the big vendors begin to feel secure that the modest rebound in their sales and stock prices is for real, their appetite for deals will only grow. For many tech executives, particularly those who got the top job during the boom, that's not a cheery prospect. "A lot of these CEOs were divisional heads of a large company, and they will be going back to that job," says a New York-based money manager.

Months before his PeopleSoft gambit, Ellison began mapping out all the possible merger permutations in his industry. It sounded like such a good idea, we decided to canvas a sampling of some of the savviest investment bankers, analysts, and tech executives to come up with our own merger scenarios. Granted, it's hard to divine the inner workings of growth-hungry CEOs' minds, and thus tricky to predict who'll try to devour whom as consolidation pressures mount. But there's powerful business logic behind these merger ideas. Some could radically transform the tech landscape for years to come and, in so doing, influence everything from how you do your job (and whether you'll have one) to where you invest your money. The dinner bell has rung; let the banquet begin.

The Deal Larry Should've Done

ORACLE BUYS BEA

The Price Tag: $5 billion to $6 billion

Going after PeopleSoft is a brute-force attempt to solidify Oracle's No. 2 status behind SAP in the enterprise application market. But as audacious as it seems, the move came on the heels of PeopleSoft's own offer for J.D. Edwards, and thus was less visionary than reactionary. A more original--and more strategic--acquisition for Oracle would be BEA Systems. "It is the most logical of all the scenarios," says Merrill Lynch software analyst Jason Maynard.

Dragooning BEA would give Oracle a much-needed competitive weapon in the bigger battle to dominate not just business apps but all enterprise software. Here's why: In addition to the applications that corporations buy from Oracle, PeopleSoft, and SAP to calculate their financials, automate their payroll, or monitor their manufacturing output, they also need database software to store the info culled by the applications. Likewise, they need Web application server software to integrate the programs and make them available to far-flung employees around the world. Taken together, these three components--the database, the application server, and the end applications themselves--make up the core of the enterprise software "stack."

Controlling the stack is the key to market dominance and killer margins. Oracle is a big-time player in databases and enterprise apps, but its application server has disappointed. "That is a gaping hole," Maynard says. "Oracle needs to buy BEA if it wants to have a credible play in the application server market." The application server is critical because, much like an operating system on a PC, it's increasingly what enterprise programs are written on top of, and it's tied deeply into the database software. BEA is Oracle's only choice in this area. The other credible application server belongs to IBM, which also happens to be Oracle's biggest competitor in databases. The good news for Oracle is that most BEA application servers are already paired with an Oracle database. And don't assume that BEA is safe if Oracle does eat PeopleSoft; Oracle won't comment on BEA, but it apparently has the stomach for multiple acquisitions. "It's not like if we do the PeopleSoft deal we can't do any more," says Oracle executive vice president Charles Phillips. "It's not a stretch for us financially."

WHY IT WILL WORK: Larry has at least 10 good years left, and he still thinks he can beat Microsoft. Deals like this may help.

WHY IT WON'T WORK: Despite Phillips's contention, cost could be a problem; BEA's $4.4 billion market cap is roughly the same as PeopleSoft's before the Oracle bid, yet BEA's $1 billion in revenue is only half as big. And Hewlett-Packard or another rival might beat Oracle to the punch.

THE ODDS: 5-to-1

Big Blue Responds

IBM BUYS SAP

The Price Tag: $45 billion to $50 billion

If a feeding frenzy in the enterprise software waters consumes companies like PeopleSoft and Siebel Systems, or if Oracle completes its stack by gobbling BEA, Oracle's fiercest rival--IBM--may have no choice but to retaliate with overwhelming force. Years ago, IBM got out of enterprise apps to concentrate solely on the underlying infrastructure software, such as databases and application servers. By not competing on the business apps, it became an attractive partner for enterprise software companies, which help drive sales of its infrastructure software and consulting services. But if Oracle kills everyone, a Silicon Valley investment banker notes, "SAP does seem to be the likely scenario for IBM. If it crosses the Rubicon and declares itself a competitor to its thousands of partners, it will have to do it in a bold way." Absorbing Germany's SAP, with its $8.5 billion in revenue and 19 percent share of the enterprise software market, is the only way IBM can get back in the applications game in one fell swoop.

Though fraught with peril, the move would further cement IBM's shift to higher-margin software and consulting. Since enterprise apps are so complicated and difficult to install, "they are a printing press for services," says Deutsche Bank analyst Skiba. Remember, half of IBM's current business comes from IT services.

WHY IT WILL HAPPEN: SAP was founded by former IBMers, so the cultures would mesh well. And what's good for services is good for Big Blue.

WHY IT WON'T HAPPEN: IBM would have to abandon its neutral stance on other vendors' apps, one of its strongest competitive advantages.

THE ODDS: 20-to-1

The Incredible Hulk

CISCO BUYS EMC AND SUN MICROSYSTEMS

The Price Tag: $28 billion for EMC; $19 billion for Sun

Cisco Systems has almost $120 billion in market capitalization and $19 billion in sales, and it's only a matter of time before it revs up its M&A machine again. Acquisitions are in Cisco's bones; through the years, it has bought scores of relatively small companies and absorbed their technologies and biggest brains. But many investment bankers believe that Cisco now must shoot for a megadeal, in large part to seize on fundamental technology trends that, if deftly exploited, could put Cisco up there with Microsoft and IBM in terms of competitive power and technological influence.

The key trend is the movement of more IT hardware directly onto the network. Everything from storage to computing, which today is still centralized in corporate data centers, may soon be dispersed to the network itself, attached as subsystems to routers and switches. Cisco owns that market. Buying EMC would enable Cisco to expand into storage, and it would also bump Cisco's revenue by about $7 billion in fiscal 2004. EMC already faces competition from storage providers like Network Appliance; combining with Cisco would help stave off that threat. "Cisco wants to capture incremental dollars as a solutions provider, and storage is part of that solution," says Arnie Berman, head of research at SoundView Technology Group.

Going after storage is a no-brainer for Cisco. Targeting Sun would be brazen--in fact, downright shocking to some in Silicon Valley. But the deal could save the fading Sun. Its servers are being swapped out for Linux boxes on the low end, and IBM is breathing down its neck on the high end. And computation, like storage, increasingly will be embedded in the network itself. Cisco could easily add Sun's so-called blade servers--powerful computers in the form of plug-in cards about the size of an ice-cube tray--to routers and switches. Sun's emerging N1 software, designed to automate and control networks of servers and other hardware, could manage it all. Cisco, which already employs Sun co-founder Andy Bechtolsheim, would also pick up fresh squadrons of gifted engineers; despite its problems, Sun still has some of the best coders and hardware designers in tech. An added bonus for Cisco: Sun's $2.6 billion in cash.

WHY IT WILL HAPPEN: Cisco desperately needs new sources of revenue to justify its still-inflated stock price.

WHY IT WON'T HAPPEN: Sun's proud management, led by Scott McNealy, might counter by buying Sun itself in partnership with a leveraged-buyout firm (perhaps Silver Lake, where former Sun president Ed Zander recently became a partner).

THE ODDS: Cisco-EMC, 5-to-1; Cisco-Sun, 15-to-1

No Strings Attached

AT&T WIRELESS BUYS CINGULAR

The Price Tag: $25 billion

AT&T Wireless and Cingular are like Ross and Rachel from TV's Friends. It seems inevitable that they'll get together. The question is more when than if.

Six national wireless carriers are three too many. Most of the carriers are bleeding money, and analysts have been predicting a consolidation spasm in wireless for almost two years. The rumors are running hotter now. Cody Willard, a telecom investor and principal at consulting and research firm Teleconomics, believes that "AT&T Wireless and Cingular are talking." (Neither company will comment.) Willard, who owns shares of AT&T Wireless, says its marriage with Cingular, a joint venture between BellSouth and SBC Communications, is likely to be the first in a wave of deals that transforms the wireless market.

There's strong business logic in such a hookup. AT&T Wireless has about 21 million subscribers and had 2002 revenue of $15.6 billion. Its network covers 74 percent of the U.S. population. Cingular has 22 million subscribers and had sales of $14.7 billion in 2002. The carriers support the same types of networks, based on the older TDMA wireless standard and on the more current GSM standard. Together, the companies would have more than 40 million subscribers, outpacing the current leader, Verizon, which has about 32 million. Experts like Willard believe that the merger could produce cost savings worth billions of dollars, while allowing the companies to spread the expense of upgrading their separate networks.

Cingular, moreover, is one of the most vulnerable stragglers in the wireless herd. It has been losing customers for the past several quarters, and its 2002 revenue grew just 4 percent. AT&T Wireless has problems of its own, but its sales grew 15 percent last year, and it's strong in the vital corporate marketplace. AT&T Wireless's average revenue per customer is higher, and it has better brand presence. What's more, the two companies have a history of working together: In March they formed a joint venture to build a high-speed network along more than 4,000 miles of rural U.S. highway.

WHY IT WILL HAPPEN: It would save the companies a billion or two, and plug the gaps in their networks.

WHY IT WON'T HAPPEN: A foreign carrier like NTT DoCoMo, which already owns 16 percent of AT&T Wireless, or Deutsche Telekom might scoop up AT&T Wireless before it can swallow Cingular.

THE ODDS: 1-to-2

Burn, Baby, Burn

APPLE BUYS ROXIO

The Price Tag: $150 million

Steve Jobs won't ever admit that he needs help, but Apple's 3 percent PC market share suggests he ought to. The company is sitting on $4.5 billion in cash--money that investors would like to see put to good use. Big acquisitions outside Jobs's field of expertise, like the once-rumored Universal Music deal, are loco. But more modest buys that help him expand his reach into the Microsoft Windows world to entice the other 97 percent of computer users to try Mac products make a lot of sense. That's why rumors have been flying about Apple buying Roxio.

Roxio, based in Santa Clara, Calif., is best known for paying $5 million for the Napster brand and $40 million to take the faltering Pressplay music service off the hands of Sony and Universal. It plans to launch a new digital music service under the Napster name. That's pretty much worthless to Jobs, whose iTunes Music Store is the most successful commercial digital music service to date. (Yes, the Napster brand still enjoys tremendous name recognition, but so does Al Capone.) What may tempt Jobs, however, is Roxio's CD-and DVD-burning software, which makes up the bulk of the company's $120 million in sales. Roxio makes the most popular CD-burning software for Windows; Jobs wants to make his iTunes Music Store available to Windows users, and what's holding him up is "the software work," according to Raymond James analyst Phil Leigh. The ability to burn the music you buy onto a CD is one of the key features of the iTunes service. Apple can write its own CD-burning software for Windows, but that takes time. The sooner Apple gets a Windows music service out there, the more it can capitalize on its current buzz and momentum. Roxio also has highly regarded photo-and video-editing software for Windows--and, as of the end of March, had $54 million in cash that would cut the deal's true cost by about a third. As for Napster, Jobs could give it the mercy killing it deserves.

WHY IT WILL HAPPEN: It gives Steve Jobs a chance to finally dominate something.

WHY IT WON'T HAPPEN: In June, Roxio raised $22 million in a private placement--not the action of a company trying to sweeten itself for an acquisition. And Jobs may decide he can build the technology in-house.

THE ODDS: 8-to-1

Search & Destroy

YAHOO BUYS OVERTURE, THEN MERGES WITH DILLER'S INTERACTIVECORP

The Price Tag: $1.4 billion for Overture; $25 billion for merger

Here's a two-course meal that starts with a light appetizer and finishes with the M&A equivalent of a thick slab of prime Texas steak. First, Yahoo munches paid-search provider Overture. That would go down smoothly: Yahoo has almost $900 million in cash, and would likely pay with some combination of cash and its stock--which still carries one of the richest valuations in the market. (Yahoo's current price/earnings ratio is 137, higher than eBay's 101.) Through paid listings that appear as the top results whenever somebody conducts a search on Yahoo, Overture already provides about a fifth of the Web portal's ad revenue--a contribution expected to top $200 million this year. But why split that money 60-40 with Overture, as the two companies' current deal requires? Why not take it all?

The real gut-buster is the main course: a merger with Barry Diller's InterActiveCorp, parent of Citysearch, Expedia, the Home Shopping Network, Hotels.com, Match.com, and Ticketmaster. InterActiveCorp has a market cap of roughly $22 billion, 10 percent more than Yahoo's, so the odds would be on Diller winning control. Diller's goal is to build the largest e-commerce company in the world. Yahoo and InterActiveCorp, says one M&A banker, are a "natural fit." Yahoo under CEO Terry Semel (an old Hollywood pal of Diller's from their days as studio moguls), the banker says, is becoming "a mini-InterActiveCorp" by also selling services over the Web--travel, dating, loans, tickets. The companies would benefit from the network effects of combining similar services like Match.com and Yahoo Personals, and Diller would be able to start feeding traffic from Yahoo to his individual properties.

WHY IT WILL HAPPEN: Overture could be a money machine for Yahoo, and the subsequent buyout by Diller would crown his campaign to become the king of e-commerce. Plus--and this is not insignificant--he could drop that goofy InterActiveCorp name and adopt Yahoo, one of the most recognized brands in business.

WHY IT WON'T HAPPEN: Diller usually isn't wild about diluting his personal ownership stake by buying up huge things. Another possibility: Microsoft swoops in to acquire Overture before Yahoo makes its play.

THE ODDS: Yahoo-Overture, 3-to-2; InterActive-Yahoo, 10-to-1

Purge & Merge

AOL TIME WARNER DUMPS AOL AND BUYS ELECTRONIC ARTS

The Price Tag: $0 (give or take $5 billion)

AOL Time Warner (Business 2.0's loving parent) probably should be banned from mergers. The combination of AOL and Time Warner at the height of the dotcom bubble ranks as one of the worst deals of all time ($260 billion in market value up in smoke). But what if Time Warner could partially undo its mistake and get into a new and faster-growing area of digital content instead? By, for instance, dumping the AOL online division and buying videogame maker Electronic Arts.

The notion of selling or spinning off AOL has been floated before because the stock market is basically valuing AOL at zero. But the division still boasts 34 million Internet subscribers and spits out about $1.5 billion in cash flow. Estimates on how much money AOL could fetch vary, but they average $10 billion to $12 billion. As an added bonus, AOL Time Warner could shunt about $8 billion of debt onto the spinoff. The company's remaining debt of $18 billion would be so manageable--and its stock might get such a nice bump--that the newly liberated Time Warner could celebrate by going shopping.

So why EA? Last year more money was made from videogames than at the box office, yet videogames are the one entertainment content business in which AOL Time Warner does not participate (at least not since selling its last stake in Atari in 1996). It has books, magazines, movies, music, and cable TV. Yet if the company truly believes in the future of digital entertainment, well, it doesn't get much more digital--or entertaining--than videogames. EA is the biggest software company in the business, and it's still growing. It posted $2.5 billion in 2002 sales, and its profits tripled to $317 million. "I think eventually Electronic Arts goes to some studio-oriented media player," says one tech investment banker. An AOL-free Time Warner fits the description. EA would be a far better cultural fit than AOL--which isn't saying all that much--because EA runs its business like an old Hollywood studio. Many of its hits are based on brands licensed from movies or sports. Time Warner would have to pay something north of EA's $11 billion in market cap, but the cash from offloading AOL could cover most of it.

WHY IT WILL HAPPEN: It ends the pain and may even lift loads of executive stock options above water.

WHY IT WON'T HAPPEN: The videogame industry could be at the peak of a cycle--better to wait until it hits a trough. Besides, the penalty for merging with AOL has already been exacted. And who would want to buy it?

THE ODDS: AOL spinoff, 7-to-1; EA acquisition, 10-to-1

Erick Schonfeld (eschonfeld @business2.com) is editor-at-large at Business 2.0; Om Malik (omalik@business2.com) is a Business 2.0 senior writer.