Cash-rich tech companies may buy rivals as shares drop
SAN FRANCISCO (Reuters) - Technology companies that are flush with cash may be aggressive acquirers in a stumbling economy as falling share prices make rivals more affordable.
Tech companies typically have big cash stockpiles because they generate strong cash flows and need to fund expensive research, build new plants, buy equipment and hire highly paid engineers. Some of the cash is routinely used for acquisitions. But the pace is expected to pick up.
"There clearly is an opportunity that you could see M&A activity in the technology space as valuations have come down substantially," said Brent Bracelin, a technology analyst at Pacific Crest Securities.
"You could see companies with large cash hoards swallow up some of the new tech companies that are out there."
Industry leaders such as computer and printer maker Hewlett-Packard Co (HPQ.N), International Business Machines Corp (IBM.N), business software provider Oracle Corp (ORCL.O) and data-networking leader Cisco Systems Inc (CSCO.O) are among U.S. companies with large cash reserves that could be used for acquisitions, analysts said.
And with interest rates down and technology shares trailing most sectors, dealmaking is one of the better options for using corporate cash.
"With shrinking demand in certain sectors, it always makes sense to do this (consolidation) during recessions," said Kim Caughey, senior analyst and portfolio manager at Fort Pitt Capital Group, which oversees $1.2 billion, including major technology stocks.
"Whenever valuations fall, it gives acquiring-minded companies an opportunity to buy," she said.
Acquisitions have also become more attractive because falling interest rates mean lower returns on cash invested in short-term money market securities such as U.S. Treasury bills, commercial paper and bank certificates of deposit.
"If interest rates are going down, you take a little hit" and seek alternate uses for cash, such as long-term investments, said Donald Carty, chief financial officer of computer maker Dell Inc (DELL.O), speaking on the sidelines of a recent investor meeting.
Dell has begun buying companies after largely avoiding deals, and it said recently it may buy more.
About two months ago, Microsoft Corp (MSFT.O) made an unsolicited $42 billion bid for Yahoo Inc (YHOO.O). The offer came after Yahoo's stock slumped to its lowest level in more than three years following disappointing quarterly results and a somber outlook. The deal would be the technology industry's largest ever.
TECH SHRS OFF AVG 13 PCT
Market values of technology companies are down an average 13 percent this year -- the second-worst performing sector on the Standard & Poor's 500 index .SPX -- making tech companies ripe for takeovers.
U.S. companies in technology, semiconductors, telecommunication equipment and phone services ranked No. 2 in cash holdings in the fourth quarter, behind only utilities, according to a Thomson Financial analysis of S&P 500 companies. Continued...
