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MergerTalk: Techs Have M&A Bankers Busy
Saturday February 21, 7:53 pm ET
By Julie MacIntosh


NEW YORK (Reuters) - The technology industry, a dormant area for mergers and acquisitions since the boom days of the early millennium, looks set to return to life this year.
Stock market gains have turned potential buyers' shares into valuable currency, and more discussions are turning into full-fledged deals, several merger advisers said this week.


Tech sector companies have announced merger agreements worth $10 billion in the first six weeks of this year, $500 million more than in the entire first quarter of 2003, according to Thomson Financial data.

"If it picks up from here, we're going to have to do some hiring for the first time in quite a while," said Karl Will, head of technology mergers and acquisitions for JP Morgan. "We are very, very busy right now, and I suspect all our competitors are as well."

Investors' expectations for a tech market recovery remain tempered, and the sector's leading companies have stayed optimistic but cautious.

Still, technology companies could get back into the market for acquisitions as they look to fill gaps in their products and services caused by cuts in spending and their boards and management become less risk-averse.

"The ramifications of not buying new technology over the course of the last couple of years are going to come home to roost at some point," Will said.

RATIONALITY RETURNS

The frenetic pace of tech and media M&A five years ago, helped along by fledgling companies conducting billion-dollar deals, prompted some acquisitions that should never have been done, industry bankers agree.

America Online's combining with Time Warner Inc. yielded far fewer synergies than advertised, and wiped out hundreds of billions of dollars in shareholder value.

Intel Corp.'s purchase of DSP Communications in 1999 resulted in a $600 million write-off for Intel last year. And magazine publisher Primedia Inc.'s much-hyped agreement to buy About.com in October 2000 came just before one of the worst advertising downturns in decades.

But lessons learned as the boom days ended abruptly could keep the tech sector from turning overly exuberant -- or less responsible -- this time around.

"I think the psychology has changed, and people are looking at their prospects in the way people in other industries do," said Michael Biondi, chairman of investment banking at Lazard.

Integrating newly acquired businesses presented roadblocks for some tech sector buyers during 1999 and 2000. Those failed experiments have made the market more critical of tech mergers, a shift that should prove healthy for the industry.

"Since the bubble, the market has been more skeptical of the rationale behind deals," said Matt L'Heureux, head of tech, media and telecom M&A at Goldman Sachs. "Many of the deals that are getting done now are those that have very strong rationale and are easy for the market to understand."

PRODUCTIVE TALKS

The number of active discussions taking place between players in the tech industry started to build in the fourth quarter, and a larger percentage of those talks are evolving into concrete deals, bankers said.

Tech sector players are also starting to refocus on merging to build their businesses, not just to cut costs.

Juniper Networks, for example, agreed this month to buy network security company NetScreen Technologies for about $3.4 billion in stock, largely to build strength in security products and diversify its telephone company-laden customer base.

That deal could focus tech sector buyers on the rest of the Internet security vendors, said several sources, who also saw plenty of room for consolidation in the software, IT services and semiconductor markets.

The stock market's rebound has also allowed tech companies to grow more comfortable using their stock as currency, which could promote more activity and slow the trend of cash being a larger component of deal considerations.

Tougher restrictions from the Department of Justice or a volatile stock market could derail some of the tech sector's revitalized activity. But merger advisers stayed optimistic.

"We're expecting a great year, and I think we're indicative of where Wall Street is right now," JP Morgan's Will said.