Fear and Greed in Silicon Valley

Why mergers and acquisitions will keep happening through the middle of next year, recession or no recession.

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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