BUSY WEEK HAS EXPERTS EXPECTING BOOM IN MERGERS
Mercury News – Mon, June 09, 2003
By Chris O’Brien
Goodbye, IPO. Hello, M&A.
The last week has seen a spectacular string of proposed mergers and acquisitions that observers say is just the start of what is expected to be a period of rapid consolidation in the technology industry.
In the way that the initial public offering became the hallmark of the boom, mergers and acquisitions may be poised to become the downturn’s signature deal.
For Silicon Valley, this was a week filled with more courtship talk than a Las Vegas wedding chapel:
Executives at large tech companies are increasingly accepting that the era of rocketing revenue growth may be over as the industry matures. Using their piles of cash, they’re hunting for small and mid-size companies that will get them instant entry into new markets and access to new customers.
At the same time, many of these smaller players either have woeful stock prices or are running short of venture capital. With IPOs no longer an option and big corporate customers reluctant to buy products from shaky upstarts, their best bet to secure their financial future is to be bought by a Cisco Systems or Microsoft.
The result is a fertile environment for deal-making that is driving companies into each other’s arms. If consolidation does quicken, it could force a dramatic change in expectations for everyone in Silicon Valley, from entrepreneurs to venture capitalists to CEOs.
”The IPO windows are not going to open like they did before,” said Ron Lissak, managing partner for Catapult Advisors, a San Francisco investment bank. ”So you’re going to see a huge wave of consolidation.”
As tech spending collapsed in early 2001, many executives insisted the slowdown was temporary and that things would pick up again in six months. Two years later, the recovery is still at least six months away.
The prolonged slump has changed the thinking of many top CEOs. Earlier this year, Oracle CEO Larry Ellison said in an interview that he believed the tech industry had matured to the point where rapid growth could no longer be expected.
The first salvo fired in the consolidation battle came in September 2001 when Hewlett-Packard said it would buy Compaq. In justifying the purchase, HP CEO Carly Fiorina said she expected the industry to rapidly consolidate leaving only a handful of giants.
There hasn’t been another mega-merger since the HP-Compaq deal was consummated a year ago. And overall, M&A numbers have fallen for four straight quarters, from 624 deals in the first quarter of 2002 to 474 deals in the first quarter of 2003, according to Broadview, an investment bank that focuses on technology.
But in recent months, investment bankers at places such as Catapult and Broadview say their pipelines are beginning to fill up with pending deals, giving them more work than they can handle.
In cases such as Palm and Handspring, where both companies are hurting, acquiring a competitor is a marriage of last resort.
”Companies are struggling and they need to combine just to survive,” said Bill Tulin, a partner in the transactions advisory services group at Ernst & Young. ”The reality that things aren’t turning around is just starting to hit a lot of these companies.”
For larger companies like PeopleSoft and Oracle, where revenues have been relatively flat or declining, the desire to acquire is being driven by the need to find new markets and new customers.
”The number of customers out there isn’t increasing dramatically,” said Mike Kelly, vice chairman of Broadview. ”Software companies can’t rely on acquiring customers. So they have to acquire companies with customers.”
Fortunately for these bigger companies, it’s a buyer’s market. Many of them have amassed large amounts of cash and find they are in a position to vacuum up a host of smaller companies. And they’re being approached by small and mid-size companies seeking buyers.
”We went from no one wanted to sell their business two years ago to now everyone wants to sell their business,” Lissak said. ”The No. 1 question I get is, ‘How can I make my company more attractive to Microsoft?’ ”
At Cisco Systems of San Jose, its acquisition pace has not returned to the peak level it reached in 2000, when the networking giant absorbed 23 companies. But in the past six months, it’s acquired four companies, according to Craig Griffin, Cisco’s director of business development.
There are any number of reasons a small company would wish to be absorbed into a bigger operation. Smaller companies can often find it difficult to sell to large corporate customers who worry that a financially weak start-up may not be around. In addition, larger spenders would rather deal with fewer vendors, preferring that smaller companies be integrated into bigger, more stable partners.
”I see many companies coming to us and openly admitting that they need the distribution capabilities and the backing of a company like Cisco,” Griffin said.
Because so many small companies and start-ups are running short of cash, it’s also hurting the price they can command in an acquisition deal. For venture capitalists, the prospect of a lower payoff means they need to recalculate the amount they can invest in a start-up before either shutting it down or selling it, Kelly said.
That, in turn, means entrepreneurs can’t expect to have endless amounts of cash to burn through before they have a product to sell.
”It makes you look differently at what you’re investing in,” Kelly said. ”Everyone’s pocketbook is getting a lot tighter.”