Cash-rich tech companies may buy rivals as shares drop

By Philipp Gollner

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: Quote, Profile, Research, Stock Buzz), International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz), business software provider Oracle Corp (ORCL.O: Quote, Profile, Research, Stock Buzz) and data-networking leader Cisco Systems Inc (CSCO.O: Quote, Profile, Research, Stock Buzz) 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.