Over the past couple of months, tech companies such as SAP (NYSE:SAP), McAfee (NYSE:MFE), Microsoft (NASDAQ:MSFT), and Oracle (NASDAQ:ORCL) have made some interesting headline M&A deals. Is this the start of a major trend? It may be. This is according to a tech research firm, The 451 Group.
First, let's get some background. The 451 Group reports that private equity (PE) tech deals surged 138% this year to $183.7 billion. Strategic deal making, on the other hand, plunged 31% to $212.4 billion. A strategic deal is when a company buys another firm in the same industry.
Here are the top five strategic and PE deals for 2007:
Strategic deals
|
Date |
Parties |
Amount |
|---|---|---|
|
02-19 |
XM Satellite Radio / Sirius Satellite Radio |
$13 billion |
|
02-12 |
Vodafone Group PLC / Hutchison Essar Ltd. |
$11.1 billion |
|
10-01 |
Nokia Corp. / Navteq |
$8.1 billion |
|
10-07 |
SAP AG / Business Objects S.A. |
$6.7 billion |
|
05-18 |
Microsoft / aQuantive |
$6.3 billion |
Private equity deals
Date | PE Buyer(s) | Target | Amount |
|---|---|---|---|
06-30 |
Ontario Teachers' Pension | BCE | $48.5 billion |
04-02 | KKR | First Data Corp. | $29 billion |
05-20 | TPG Capital, GS Capital Partners | Alltel | $27.5 billion |
06-04 | Silver Lake Partners, TPG Capital | Avaya | $8.2 billion |
05-17 | Blackstone Group | Alliance Data Systems | $7.8 billion |
However, if you take a look at the activity since August, there's been almost a complete switch. PE deals plunged from $42.3 billion to $5.1 billion while strategic deals increased 20% to $51.9 billion.
To get perspective, The 451 Group surveyed 62 respondents who represent companies that have spent $150 billion in M&A deals over the past five years.
Interestingly enough, more than 85% of the respondents said they expect to maintain or increase their M&A activity over the next 12 months. Of this group, about half plan to increase their spending and less than 10% see a decline.
Why the optimism? One reason is the crumbling of the PE market, which means strategic acquirers have less competition. For example, Cerberus yesterday withdrew its $6.1 billion bid for Affiliated Computer Services (NYSE:ACS) because of difficulties with financing.
Next, tech companies have accumulated large amounts of cash on their balance sheets. In fact, the companies of The 451 Group survey have about $60 billion in the bank (this is after they have shelled out about $7 billion this year on transactions). No doubt, part of this will go to share buybacks. But at the same time, there's lots of firepower to get deals done.
The bulging cash positions are partly the result of retrenchment from the dot-com bust. The upshot has been a fall in R&D spending. "There is a need for tech vendors to keep innovating by buying up emerging players," said Tim Miller, who is vice president and general manager, financial markets at The 451 group. "On the supply side there's a swarm of venture-backed companies ripe for exits."
Another possibility is the influx of foreign buyers, in light of the falling dollar. European buyers may find bargains in the U.S. and perhaps even some of the major IT companies in India. Keep in mind that 40% of the survey respondents see an uptick in activity from non-U.S. acquirers.
Finally, large software firms are finding it tougher to grow. So why not buy companies? It's been a critical strategy over the past few years for companies like Oracle -- and shareholders are taking notice. IBM has also been aggressively buying companies. Even SAP, which has often talked about growing organically, recently agreed to shell out $6.6 billion for Business Objects (NASDAQ:BOBJ).
Of course, surveys can be wrong and there are a variety of factors that can derail an M&A trend, such as a slowdown in IT spending. Nonetheless, it does look like there are compelling reasons for deal making. So, Foolish investors, we may see a lot more headlines.
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