Weak Mergers, Acquisitions Activity at Cisco, Google Reeks of Recession

 
 
By Clint Boulton  |  Posted 2008-12-22
 
 
 

Weak Mergers, Acquisitions Activity at Cisco, Google Reeks of Recession


If you've noticed an acquisition drought among high-tech companies this year, you're spot on.

The financial crisis forged in the putrid real estate market and the woeful Wall Street credit crunch has bled over into the high-tech industry in the last several months, handicapping some companies' merger and acquisition schedules, according to a year-end analysis from The 451 Group's Brenon Daly released Dec. 18.

Daly logged 2,804 deals to the tune of $290 billion in 2008, compared with 3,637 deals totaling $481 billion in 2007.

This 40 percent decline would be a frightening fall-off in any business, but it is especially horrifying in high-tech, where M&As are common practice as larger vendors suck up startups from the long tail. Moreover, there were just 32 high-tech deals worth $1 billion or more in 2008, compared with 80 in 2007.  

Networking giant Cisco Systems has announced only four deals in 2008, or one-third as many deals it has been averaging over the past three years. Search engine leader Google, whose stock has plummeted by well over half since December 2007, has made just four buys in 2008 after averaging a deal per month over the past two years.  

Dell, which pledged in 2007 to acquire more companies to diversify its waning direct sales computer business, bought only one company in 2008, compared with six in the second half of last year. All this caused Daly to declare:

After four straight record years, the great bull run of tech M&A is officially over. The cash-rich corporate shoppers and free-spending buyout shops of recent years-which combined to push tech deal making last year to a nearly half-trillion-dollar business-stepped out of the market in 2008. So far this year, M&A spending is running almost 40 percent below where it was last year, with the falloff felt in virtually every sector of technology.

Of course, not every bellwether tucked its head in during the dog days of 2008. Database and applications provider Oracle racked up 11 acquisitions in 2008, the same number of deals it consummated during a more solid 2007. Oracle held to its approach of buying instead of building to make up market share, but Oracle was clearly an exception to the norm in high-tech.

So, what does this portend for the future of high-tech M&A? "Undeniably ominous," is the phrase Daly chose to describe the situation. While the dot-com bubble burst of 2000 was caused in part by the hubris of a lot of green companies that didn't understand the Internet, he said this recession will hurt more, taking two years or longer to resolve.

The 451 Groups Expectations for 2009: Bleak


Uncertain financial outlooks from Google, Intel, Cisco, Nokia and Oracle could impede acquisitions by these companies, which would have to deal with integration risks.

Expect tuck-in or "bolt-on" acquisitions, or low-risk deals that allow companies to sell technology developed by a startup into their existing customer bases, as opposed to "transformative deals" that get them into new markets.

Startups looking to weather the brutal financial storm under the wing of a larger company should take note here. If you're going to sell out, sell out early in 2009.

Gartner Research analyst Matt Cain recently told eWEEK that while the market for enterprise social software will see some consolidation in 2009, not every startup looking for a home will find one.

"It's a game of musical chairs," Cain said. "If you're going to find a home, do it early because three years out there may not be a lot of homes left. There's some pressure to cash out early."

Indeed, Daly said with venture dollars getting even scarcer, startups that are still burning cash will face even more pressure to take a deal. Meanwhile, quality companies will separate themselves from other vendors more quickly than during a time when business is booming.   

GigaOm's Om Malik summarizes The 451 Group's outlook. This includes the sell-off of non-core businesses by large companies (Nokia just sold off its security appliance business to rival Check Point), more unsolicited bids, more venture-backed companies trying to buy out publicly traded competitors and, of course, lower valuations for 2009.

"In our survey of corporate development officers, nine out of 10 said they expect prices of private companies to decline next year," Daly wrote. "Specifically, 42 percent said valuations would 'decline substantially,' with 45 percent predicting they would 'decline somewhat.'"

The expectation of valuation decline was consistent with what corporate development executives from Google, Microsoft, IBM and Sun Microsystems said during a panel in Silicon Valley earlier in December.

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