May 23, 2009

Expected Rise In Technology Acquisitions

Bargain-rate valuations and hopes of economic recovery are enticing cash-rich tech firms to seek acquisitions, with many expecting a string of such deals during the second half of the year.

Leading technology companies such as IBM, as well as boutique players such as NetSuite, have assessed the recession-caused damage to their balance sheets, and are looking towards new growth opportunities.

The year has already seen some major acquisition activity, such as Oracle Corp's. purchase of Sun Microsystems Inc. for $7.1 billion, Broadcom Corp.'s hostile quest of Emulex Corp for $764 million and last week's announcement by NetApp Inc that it was seeking to acquire Data Domain Inc for $1.5 billion.

The pace of acquisitions should accelerate in the months ahead, according to technology executives speaking at the Reuters Global Technology Summit in New York this week.

However, most deals will likely be small to medium-sized, they said.

The executives agreed that potential acquisition targets were less expensive now than even a few months ago.  However, they were divided on whether the valuations have reached their bottom or might fall even further should signs of an economic recovery prove temporary.

"Valuations could go lower," Sybase Inc. CEO John Chen told Reuters.

"Somehow everybody thinks things are on the rebound. I think we're going to stay low for a while."

The company is looking at potential acquisitions to grow its mobile enterprise business.

Chen said he is often approached by venture capitalists and private equity firms who wish to sell him their start-up firms.

"Some of the start-ups are under the gun a little bit ... But we're cautious. There is no hurry," Chen said.

Enrique Salem, CEO of Symantec Inc., said he also expects valuations to fall further in the months ahead, and is being patient about acquisitions.

"We have $2 billion in cash, very little debt, high recurring revenue, so we have the opportunity to do M&A," Salem told Reuters, adding that the company seeks to acquire firms to expand its core security, storage and systems management businesses.

However, "private companies' valuations need to be reset. I don't think private companies at this point have realized that there's been a change in the economy," he said. 

But other executives believe tech valuations are low enough to start shopping.

Ari Balogh, Chief Technology Officer of Yahoo Inc., called current tech valuations "amazing" when compared with their levels just a few months ago.

"It's a good time to be buying now," Balogh told Reuters.

Yahoo is in the process of adding more social networking features to its properties as part of a renewed turnaround strategy.

"I can guarantee you there will be some acquisitions," he said.

Mark Loughridge, chief financial officer of International Business Machines (IBM) Corp., shared Balogh's bullishness.

"I go through a deal review every week," he told Reuters.

The current environment provides a "fertile" hunting ground for acquisitions, he added.

Even specialty glassmaker Corning Inc., which has historically not been an aggressive acquirer, is on the lookout for attractive acquisition candidates. Chief Financial Officer Jim Flaws said the company is expanding its mergers and acquisitions team.

Companies that were previously too costly to acquire are now available at attractive prices amid the recession, Flaws said.

"Right now we have the money to do small acquisitions ... and we are actively looking."

Dell Inc. President Steve Shuckenbrock suggested companies should consider acting fast or they may lose out on potential targets as a wave of consolidation hits the industry.