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Will tech deals impact your decision-making? As record-setting tech company M & A continues, the resulting consolidation of IT companies is sure to impact CFO decision-making. Will it help or hinder?

Technology M & A has soared in recent years as a result of consolidation within hardware, software and telecommunications markets and aggressive spending by vendors to bolt on new technologies. IT and finance executives at end-user companies may well feel the downstream impact of these deals in months and years to come as M & A thins the ranks of vendors they buy from. They may also deem the consolidation helpful in accelerating the introduction of new products and services that save them money and that enhance the effectiveness of technology.

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As we charge through 2007, the pace is quickening. From 2002 to the present, acquirers around the globe have paid more than $1.2 trillion to buy nearly 14,000 technology companies. M & A spending has accelerated in recent years, with $412 billion spent in 2006; that was nearly twice the amount spent in 2004--and more than was spent, collectively, from 2002-2004.

Activity continues apace so far in 2007, with transaction volume and dollars putting this year on track to be the fourth straight record year of post-bubble M & A. Through April 30, acquirers have announced 1,277 deals worth some $157 billion. The level of spending--excluding AT & T Inc.'s mammoth $86 billion bid for Bell-South Corp. in the first quarter of 2006--is tracking about 60 percent higher than the same January-to-April period last year, with the number of announced deals holding about even with last years' levels. That's according to the 451 M & A KnowledgeBase, the technology-specific transactions database provided by technology industry analyst firm The 451 Group (see chart on page 32).

Publicly traded companies saw a dramatic increase in acquisition attention in the first quarter of 2007 from both strategic and financial acquirers. Acquirers took over 78 public companies in the first quarter, nearly double the 40 they acquired in the same period last year. Thanks in large part to the increased focus on public targets, the number of very large deals also rose. In the first quarter of 2007, acquirers inked 20 deals worth at least $1 billion, twice the number announced in the first quarter of 2006.

In this merger-frenzy environment, just prior to press time came reports of talks of a potential deal between giants Microsoft Corp. and Yahoo! Inc.--the kind of merger that would send the numbers through the roof.

Cash is King

In a sign of the times, even as the transactions have gotten pricier and more plentiful, cash continues to be the currency of choice for acquirers. Among the corporate dealmakers on the hook for handing over at least $1 billion in cash from their first-quarter purchases: Vodafone Group PLC, Siemens AG, Swisscom AG, Oracle Corp., Cisco Systems Inc., Ericsson Inc., Verint Systems Inc. and Symantec Corp. At least three other financial acquirers also inked 10-digit tech deals, all in cash.

Private equity firms, flush with cash, are contributing mightily to the rush of dealmaking. Buyout firms spent just over $19 billion in the first quarter of 2007 to acquire 77 technology properties, more than double the amount they spent in the same quarter of 2006 and almost equal to the $22 billion they recorded for the entire year of 2004.

Buyout firms made bids for six U.S. publicly traded companies during the period, with another half-dozen foreign-listed companies also attracting leveraged buyouts (LBOs). With debt likely to remain relatively cheap for the next few quarters and several multibillion-dollar funds recently closed, The 451 Group expects buyout firms to increase their already frenetic pace of taking companies private.

What's Hot?

Enterprise software has been one of the most active sectors of M & A activity in the past few years. Since 2004, acquirers have spent nearly $150 billion to acquire more than 2,800 enterprise applications and infrastructure software companies. In the first quarter of this year, spending on enterprise software more than tripled to $19 billion on a year-over-year basis.

For applications software, spending increased nearly sixfold to $15 billion in the first quarter of 2007, compared with the first quarter of 2006. Notable large deals here included Oracle's $3.3 billion acquisition of business intelligence software company Hyperion Solutions Corp. and Siemens' $3.5 billion purchase of product lifecycle management software provider UGS Corp. from a consortium of private equity firms.

Infrastructure software saw record levels of activity in the quarter. Led by 10-digit deals for WebEx Communications and Altiris Inc., spending on infrastructure software transactions in the first quarter increased to $4.4 billion in 58 deals. That compares to $3 billion in 117 deals last year and $1.9 billion in 69 deals in 2005. Cisco's $3.2 billion acquisition of WebEx alone exceeded the cumulative quarterly totals for every year except one.

One broader market development of note in the first quarter of 2007 was the end of a drought in the initial public offering (IPO) market, which has for the past six years or so made M & A about the only exit option for technology startups. More than a half-dozen technology companies went public in the first quarter of 2007, and it is estimated that more than a dozen others are poised to register for IPOs from this writer's company's coverage universe alone.

The return of the IPO has an obvious impact on the M & A marketplace. In the near term, it gives companies and their backers another exit besides a trade sale. Longer-term, the tens of millions of dollars raised by companies in the offerings can go toward some shopping of their own.

Also, with IPOs effectively competing for M & A as an exit option for companies, the impact in some cases could be the "bidding up" of prices. This competitive dynamic may have been partly the reason that in January, for instance, Cisco paid roughly eight times its 2006 sales for privately held IronPort Systems.

Impact of Deals on Finance Executives

Technology acquisitions, particularly those in the enterprise sector, certainly have implications for financial managers of companies that use IT products and services.

First, the consolidation that is driving many of the very large deals will undoubtedly affect vendors that CIOs and CFOs deal with most frequently. For example, Oracle, one of the most active consolidators in enterprise software, has spent more than $20 billion to acquire 32 companies since it kicked off its merger spree with the acquisition of applications software competitor PeopleSoft Inc. in 2004.

The serial deals have added business intelligence, content management and a variety of vertical applications to Oracle's offerings. Consolidation such as this can help simplify the lives of corporate IT purchasers by reducing the number of vendors a buyer has to deal with.

On the other hand, concentration of software into large suites can reduce the freedom of acquirers to use "best-of-breed" software, and, notwithstanding anti-trust scrutiny, could reduce competition.

Although consolidation may drive many of the largest deals in terms of transaction value, many of the most interesting deals for CIOs and their financial colleagues may well be those add-on transactions designed to bring new functionality to existing technology offerings.

Many of these technologies have direct implications for IT costs--and almost all are driven by the desire to reduce costs and increase flexibility for end-users. Three of the major areas of innovation are:

* Virtualization: M & A has played a major role in the development of so-called "virtualization" technologies whose major contribution to IT is to offer the ability to squeeze more capacity out of existing processors, servers and networks. The seminal acquisition in server virtualization came in 2003 with EMC Corp.'s purchase of virtualization software provider VMware Inc.

Since then, EMC and VMware have built a leading position in this sector, helping to accelerate the adoption of virtualization technology that has enabled numbers of users to cut back, sometimes dramatically, on the purchase of hardware and to gain new flexibility in how they deploy technology assets.

* Open Source: M & A is also playing a major role in accelerating the advance of open source software, a technology movement that also has implications for IT budgets. Publicly traded open source provider Red Hat Inc. has announced a half-dozen deals in the past five years and Oracle, again, has been quite active in incorporating open source methods through acquisitions such as that of open source database company Sleepycat Software.

The use of open source technology is thought to provide major cost benefits to end-users. The top three areas of savings are in license costs, software maintenance costs and license management costs, according to a recent survey of IT end users by The 451 Group. The same survey found, somewhat surprisingly, that almost 40 percent of the IT end-users in the sample had no formal processes in place to assess the financial benefit of IT investments.

* Software as a Service: Deal-making is in the early stages of shaping the relatively new world of software delivered via the Internet as an on-demand service, a delivery method known as software as a service (SaaS). Salesforce.com Inc., perhaps the most visible pioneer of SaaS technology, is using acquisitions to beef up its so-called Applications Exchange, a sort of online routing terminal for a variety of on-demand applications that promises to bring a host of new applications into the on-demand model. Expect more deals in this sector as major software vendors make acquisitions to accelerate their own SaaS offerings and bring on-demand software squarely into the enterprise mainstream.

SaaS technology certainly holds promise for IT financial decision makers, especially for small to mid-sized IT shops. The delivery method has been found to help reduce or eliminate upfront license costs, speed software implementation and increase the ease and frequency of software updates.

If the first few months of 2007 are any indication, mergers and acquisitions will continue to shape the information technology landscape for the foreseeable future. CIOs and financial executives will be the final judges of whether these deals achieve their objectives of reducing the number of vendors they have to deal with, along with reducing costs and, at the same time, increasing the efficiency and effectiveness of enterprise technology

TIM MILLER is VP and General Manager, Financial Markets at The 451 Group, an independent technology industry analyst company focused on the business of enterprise IT innovation. For a special report, Technology M & A Outlook: Drivers and Disrupters in 2007, email tmiller@the451group.com.

RELATED ARTICLE: TAKEAWAYS

** Tech deals have soared in recent years as a result of consolidation within hardware, software and telecommunications markets and aggressive vendor spending to bolt on new technologies.

** Finance executives and CIOs will be impacted by the sweeping changes. Deals can reduce the number of vendors a buyer has to deal with; however, concentration of software into large suites can reduce the ability to use "best-of-breed" software and reduce competition.

** Three major areas of innovation are: virtualization, open source and software as a service (SaaS).
Technology & Telecom M & A: 2002 through 2006

Year Deals Dollars ($B)

2002 1,904 $79
2003 1,497 $59
2004 2,049 $218
2005 2,996 $361
2006 3,944 $409

$1B + deals Q1-2002 to Q1-2007

Year Number of Deals Total Spend

2002 5 $19B
2003 4 $6B
2004 6 $56B
2005 13 $62B
2006 10 $119B
2007 20 $78B

Source: The 451 M & A KnowledgeBase
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Title Annotation:DEALS
Author:Miller, Tim
Publication:Financial Executive
Date:Jun 1, 2007
Words:1879
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