Tech sector sees more deals despite tough financing

NEW YORK Fri May 23, 2008 12:51pm EDT

Mark Loughridge, CFO of IBM Corp., speaks during the Reuters Global Technology, Media and Telecom Summit in New York May 21, 2008. REUTERS/Brendan McDermid

Mark Loughridge, CFO of IBM Corp., speaks during the Reuters Global Technology, Media and Telecom Summit in New York May 21, 2008.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - The global technology industry is expected to consolidate further as companies seek niche technologies and greater economies of scale, even as troubled credit markets make it tougher to raise money for deals.

Most executives attending the Reuters Global Technology, Media and Telecoms Summit this week said they expect more mergers and acquisitions in their sectors, whether that be software, computer services or network operators.

"I do think valuations are attractive now, and I think we have advantages in this framework 'cause we have a very healthy balance sheet, strong cash generation, good cash on hand," said IBM (IBM.N) Chief Financial Officer Mark Loughridge.

"It used to be, 10 years ago, when we made the Lotus acquisition, it was kind of an opportunistic approach doing M&A. Now, it is very much an operational aspect of our business."

Even with the pullback in private equity-led leveraged buyouts, the tech industry has seen no shortage of dealmaking this year, including Hewlett-Packard Co's (HPQ.N) agreement to buy Electronic Data Systems Corp EDS.N for an equity value of $13.2 billion.

And the biggest deal in Silicon Valley this year may be yet to come, with Microsoft Corp (MSFT.O) and Yahoo Inc (YHOO.O) still giving each other backward glances.

Data from Dealogic shows technology companies globally have announced 1,991 M&A deals in the year to date, a 16 percent increase from the same period last year. But smaller deals mean the total value fell to $94 billion from $105 billion.

SWEET SPOT

Reflecting the "small is beautiful" trend, executives from software makers such as Adobe Systems Inc (ADBE.O) and McAfee Inc MFE.N expressed more interest in acquiring specialized technologies than in big, transformative mergers.

"Expect to see us do more of these small acquisitions," said Adobe CEO Shantanu Narayen, referring to companies with 10 to 50 employees that could fill technology gaps. "That really is more the sweet spot of where we're looking."

McAfee CEO Dave DeWalt said he was eyeing acquisitions worth around $50 million to $350 million.

Information storage company EMC Corp (EMC.N) has bought more than 40 companies for a total of about $8 billion since 2003. Chief Financial Officer David Goulden said the company would keep shopping.

"There aren't many who have been as acquisitive on a routine basis. And we continue to focus generally on small- to mid-size acquisitions as tuck-ins or line extensions and continue to do that this year," he said.

Goulden said the company would look at firms specializing in areas like security and Web-oriented cloud computing --a technology that enables Internet companies to deliver Web-based applications to far-flung users.

In the telecoms business, wireless service provider Virgin Mobile USA Inc VM.N expected more consolidation, particularly among smaller players.

"Over the long term networks are commodities ... What you need is more and more scale and more and more cost efficiencies," Virgin Mobile USA CEO Dan Schulman said.

FINANCING COMPLICATED

With the Nasdaq .IXIC still down 14 percent from its 2007 high even after some recovery in the past few months, tech valuations are relatively low so it's no wonder that companies with strong cash positions are on the prowl.

In the S&P 500 Index .SPX, the technology sector is expected to have the highest earnings growth of any sector in the second quarter at 15 percent, according to data from Thomson Reuters.

In Japan, where interest rates remain razor thin, high-tech glass maker Hoya Corp (7741.T) is eager to put its cash pile of about $1.5 billion to work and could spend up to $5 billion on acquisitions over the next few years.

Hoya bought digital camera and endoscope maker Pentax last year, and CEO Hiroshi Suzuki said if the company did not continue to make acquisitions in the next couple of years, half of its balance sheet would turn into cash.

"That's not good. I guess we need to do sizable acquisitions in the next couple of years," he said. "Anywhere between $1 billion to $5 billion."

But U.S. companies that need to raise debt to fund acquisitions could have a harder time as banks have turned much more cautious, executives said.

"So in the past, for example, if a company could make an acquisition and go to a bank and get a bridge loan to make it happen, today you may have to go to five or six banks or eight banks because the banks just don't have the liquidity to do that, so it's going to be much more complicated," said Hamid Akhavan, head of Germany's T-Mobile.

Venture capitalists said prudence was the word.

"In this environment it is extremely prudent ... to fully finance companies that have cash on their balance sheet, to be conservative, I would say for the next 2 to 2-1/2 years because we don't know where they're going to head in the next 12 to 18 months," said Navin Chaddha, managing director of Mayfield Fund.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Nathan Layne in Tokyo and Georgina Prodhan in Paris, editing by Phil Berlowitz)

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