Merger Fever Heating Back Up

Oracles takeover bid for BEA Systems—successful or not—is just the latest example of what is shaping up as a historic stretch of mergers and acquisitions in the technology industry.

Despite a recent slowdown in the credit markets that left private equity firms on the sidelines during the third quarter, M&A analysts still expect 2007 to be a banner year.

"Were very positive on the market right now," said Ward Carter, president of M&A advisory firm Corum Group, of Bellevue, Wash. "There was a slight disruption [in the third quarter] because of the credit meltdown, but Q4 will catch up. Theres a lot of pent up demand."

M&A activities affect much more than Wall Street speculators: tech industry history is rich with stories of companies and products orphaned by so-called strategic acquisitions. Customers can find themselves holding discontinued products and IT workers end up with skill sets that suddenly become obsolete.

This is why the current boom, which began three years ago, is worth watching. Investment banking specialist Dealogic says more than $13 trillion worth of M&A deals have been completed since then, exceeding the deals made in the tech boom years of 1998-2001. This year alone, strategic acquirers have spent more than $156 billion to acquire more than 2,000 information technology firms, according to research firm the 451 Group.

"Theres actually been a pickup already in deals in the fourth quarter," said Tim Miller, an analyst at the 451 Group. "We expect that to continue into 2008. Theres plenty of momentum to make the deals occur."

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According to a new survey by the 451 Group, more than 85 percent of corporate development professionals at actively acquiring companies say that they expect to maintain or increase current-year levels of M&A activity in the coming 12 months, with half of them expecting to increase M&A spending.

"Theres a large wad of companies that need to be sold," Miller said. "So, you have the supply and apparently the demand is there. Youre going to see more deals."

Observers differentiate between equity-based deals and so-called strategic deals, where vendors buy other companies to round out their product portfolios.

While private equity buyouts made up more than 50 percent of all technology deals this year in terms of dollar value, primarily on the strength of a handful of large buyouts, strategic deals far outweigh buyouts in terms of the number of deals. According to Thomson Financial, strategic acquisitions made up 90 percent of this years deals.

Corums Carter said the credit is getting easier to obtain again, since most of the mortgage-related losses have already come to light. "I think weve seen the bulk of what were going to see there," he said.

What tightening remains is more likely to affect private equity deals, as opposed to strategic acquisitions, he said.

With private equity firms still on the sidelines, strategic acquirers can take advantage of new opportunities, Miller agreed. About half of the 451 Groups survey respondents said the debt shakeout will increase opportunities for strategic buyers, and nearly 45 percent of those surveyed expect to see fewer buyout firms competing on deals.

"In some cases, youll see strategic acquirers picking the bones of private equity-backed companies. You could call it the revenge of the strategics," Miller said. "If we look at the recent period between Aug. 1 and Oct. 15, the private equity share of spending plummeted to 11 percent of the total."

Oracle weighs options after BEA snub. Click here to read more.

Carter said Oracles bid to acquire BEA for approximately $6.6 billion is a classic case of a strategic acquirer looking to fill out its needs, but noted, "If not Oracle, then someone else [will acquire BEA]."

Oracle has been on an M&A spree over the last few years, acquiring more than 20 companies, including a deal for the CRM (customer relationship management) giants Siebel Systems and PeopleSoft.

Unlike the hostile takeover of PeopleSoft, which spawned lawsuits and the intervention of the U.S. government, Oracle seems to want to keep the BEA bid on a short leash. "Oracle has no interest in a long, drawn-out process to acquire BEA," Oracle wrote to the BEA board Oct. 22.

Oracle further says that its offer will expire Oct. 28 if the BEA board refuses to sign the acquisition agreement and let the shareholders vote on the deal. "Oracle is no dummy," Carter said. "They will find a way."

He added that if BEA doesnt accept Oracles bid, Oracle will find another vendor to fill its needs. And despite the wishes of Alfred Chuang, BEAs CEO, to keep his company independent, another company will eventually snap it up.

BEA "is not large enough to be competitive in that market," Carter said.

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