Tech Giants in Acquisition Frenzy

By Reuters

NEW YORK (Reuters) - Technology firms are kicking off a new wave of mergers and acquisitions as cash-rich makers of hardware, software and everything in between position themselves for economic recovery and reach into new markets.

The movement toward mobile computing, the increasing importance of data storage, and the use of the Internet to access information are forcing tech players to reexamine where they want to compete, and to consider buying their way there.

Business software maker SAP AG (NYSE:SAP) made the latest move, offering to buy database system firm Sybase Inc (NYSE:SY) for $5.8 billion in a bid to move ahead of archrival Oracle Corp (NASDAQ:ORCL) in the mobile data market. Hewlett-Packard Co (NYSE:HPQ) is in the process of buying smartphone pioneer Palm Inc (NASDAQ:PALM) for $1.2 billion , while software maker Novell Inc (NASDAQ:NOVL) has put itself up for sale.

"Everybody is coming back," said Paul Parker, head of global M&A at Barclays Capital. "Tech deals have been on the rise thanks to cash buildup at many of the big companies. There is transformational activity being worked on or announced already in every sector."

Cash-rich potential buyers like Microsoft Corp (NASDAQ:MSFT), IBM (NYSE:IBM) and Cisco Systems Inc (NASDAQ:CSCO) are easy to spot. The targets -- and the premiums they will demand -- are not so obvious.

Analysts and bankers regularly cite as potential targets Akamai Technologies Inc (NASDAQ:AKAM), Brocade Communications Systems Inc (NASDAQ:BRCD), Citrix Systems Inc (NASDAQ:CTXS), NetApp Inc (NASDAQ:NTAP), McAfee Inc (NYSE:MFE), Quest Software Inc (NASDAQ:QSFT) and Red Hat Inc (NYSE:RHT).

A good deal of the cash built up by global tech firms is invested abroad, which could point to more cross-border deals along the lines of Cisco's purchase of Norwegian video conferencing system maker Tandberg, or SAP-Sybase.

Norwegian browser-maker Opera (OSL:OPERA) has been seen as a takeover target for a while, especially after BlackBerry maker Research in Motion Ltd (TSE:RIM) bought rival browser firm Torch and phone maker Nokia (BIT:NOK1V) bought Novarra.

The start of this year has been the strongest in tech M&A since the last big wave of deals in 2003 to 2007. In the first quarter, $68.8 billion worth of high-tech and telecom deals were announced, compared to $19.2 billion a year earlier, according to Thomson Reuters data.

On the eve of the Reuters Global Technology Summit, more deals seem to be on the cards. Tech firms weathered the recession better than most, and are now looking to pick up growth as the recovery accelerates.

Cisco, HP, IBM, Microsoft and Oracle are actively pursuing a large number of potential deals, said Peter Falvey, co-head of Morgan Keegan's technology investment banking group.

There are more conversations among potential merger candidates going on today than there were during the second half of last year, he said.

Wednesday's Sybase deal "is just one transaction that might be a harbinger of what is to come in the second half of the year," Falvey said. "We are expecting a significant uptick in M&A in the second half of 2010."

The key issue is what premium buyers are willing to pay. SAP's deal puts a 56 percent premium on Sybase, higher than recent deals in the sector.

It's not clear if that is setting a new benchmark, or if SAP is overpaying. Bankers say recent premiums look high because tech companies are still trading at historically low valuations despite recent rallies.

Microsoft and Apple Inc (NASDAQ: AAPL), which have both made a number of small deals recently, each have more than $40 billion in cash and short-term investments on their balance sheets, if they choose to use it.

Microsoft bought nine companies for $925 million in fiscal 2009, almost all in cash, but may not be keen to relive its failed $47.5 billion attempt to take over Internet rival Yahoo (NASDAQ: YHOO) two years ago.

Google, with $26.5 billion in the bank, has been averaging almost a deal a week recently as it picks up small companies to acquire engineering talent. But it may have its hands tied on big deals until it gets regulatory approval for its proposed $750 million purchase of mobile ad firm AdMob.

IBM, with $14 billion in cash and short-term investments, spent $1.5 billion on acquisitions last year and has signaled it is poised to get more active in making deals. Chief Executive Sam Palmisano told analysts on Wednesday that he has budgeted some $20 billion for mergers and acquisitions through 2015.

Oracle Corp (NASDAQ:ORCL) CEO Larry Ellison, who has spent more than $42 billion to buy some 60 companies over the past seven years, told Reuters in a recent interview that he will continue to be aggressive, adding hardware companies to his shopping list following the purchase in January of computer maker Sun Microsystems.

In addition to software makers, his targets include makers of semiconductors, storage, servers and networking equipment.

Another serial acquirer, Cisco, has $39 billion on hand, and has made no secret of its ambitions to grow, after moving into new areas like data center servers.

"There's been a series of progressively larger deals, it says that confidence is back," said Jefferies & Co analyst Katherine Egbert. "Buyers are saying 'we want growth.' The time is ripe, so I expect more deals."

(Reporting by Bill Rigby; Additional reporting by Paritosh Bansal, Jim Finkle, Gabriel Madway, Alexei Oreskovic and Tarmo Virki; Editing by Phil Berlowitz) 

This article was originally published on 2010-05-14