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BOSTON—The mortgage crisis continues to wend its way through the national psyche. The occasional rays of sunshine, such as the Abu Dhabi Investment Groups $7.5 billion investment in Citigroup, and comments from a Federal Reserve official to the effect that the federal government may soon cut interest rates again to stimulate the economy, seem more like temporary fixes than fundamental repairs to the U.S. economy.
The drop in consumer confidence announced at the end of November is probably a more accurate reflection of the macroeconomic picture: rising oil prices, a tightening of the labor market, and fears that reset mortgage rates in 2008 will make it harder for consumers to spend on discretionary items and even lead to further bankruptcy (leading to yet more write-downs by lenders and on and on).
But folks in the financial community remain upbeat about the technology sector, and expect M&A [merger and acquisition] activity in the sector—and IPOs to a lesser extent—to surge in December and into the first and second quarters of 2008.
Robert Louv, who heads up the software group for M&A advisory firm Montgomery & Co., said that M&A activity has grown by 75 percent in 2007 compared to 2006.
That acquisitive appetite is fueled by a conviction that the technology sector is not only growing, but that the technology being created in some areas are necessary competitive tools.
Louv, presenting at The 451 Groups annual client conference here, said companies are acquiring smaller rivals and start-ups for two reasons: fear and greed. They live in fear that a competitor will scoop up a technology company that will give them a competitive edge, and theyre greedy for growth.
To read about Dells acquisition of SAAS provider Everdream, click here.
Louvs partner, John Cooper, identified six areas that are particularly attractive to investors: Internet advertising, mobility, HCM [human capital management], GCRM [governance, compliance, and risk management], data center technology and SAAS [software as a service].
Cooper called Internet advertising a “breakaway sector,” with a potential of 35 percent CAGR (compounded annual growth) over the next few years. He added that theres plenty of room for new market entrants. “Its not going to be just Googles game from here on out,” he said.
Cooper said that mobile devices will soon have the same capabilities as PCs, meaning more business users will adopt them, leading to a greater need for mobile device management tools. He said that market will grow from $223 million in 2007 to $345 million in 2001, or 10.9 percent CAGR.
He expects the market for SAAS to grow by a stunning 30 percent CAGR between 2007 and 2010. No longer confined to CRM, SAAS is becoming pervasive throughout the enterprise. “Its really going everywhere,” he said.
He expects the market for HCM applications to grow by 18 percent CAGR, data center technology by 11 percent and GCRM by 6.5 percent CAGR.
But why is this happening against such a gloomy economic backdrop?
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Louv allowed that much of the activity is coming from European companies, who can more easily afford acquisitions in the U.S. because the euro is stronger than the dollar. The business culture in Europe is also changing, and companies are more comfortable with taking on debt than in the past. “Thats allowing them to buy growth,” he said. “And theyre desperate for growth.”
Its not just European companies who are slaking their thirst for acquisitions.
Ward Carter, president of the Corum Group, another M&A shop, said that U.S. companies are in much better financial shape than they were during economic downturn in 2002. The U.S. economy has enjoyed 4 to 5 years of substantial growth and “corporate coffers are flush with cash,” he said.
Is EMCs buying spree over? Click here to read more.
Carter also said banks are still lending readily for these kinds of transactions, but that was a few weeks ago. Today, said Louv, deals worth over $500 million are getting harder to make because “you cant get the financing.”
Louv expects M&A activity to taper off in the second half of 2008; he also admitted that if banks tighten their lending further, and the stock market keeps making like an airplane in choppy weather, activity could level off sooner than he expects.
But even if the U.S. economy slows considerably, companies will need technology as much, if not more, in order to compete more effectively.
New applications make companies more efficient and help them make better use of resources. “Those are the kinds of things companies cant afford not to be doing,” Carter said.
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