Silicon Valley Biz Ink – Friday, March 26, 2004
By Radhika Kaushik
The tech industry was coasting along like a bottom feeder after the technology bust. But now it is beginning to feel more confident and is using mergers and acquisitions to swim toward the top.
Despite the recent hammering stocks have taken, equity markets have remained relatively stable, boding well for the M&A market, as stock is often the currency of choice for acquiring companies. This stability, coupled with experience gleaned from the tech bust, is helping a less risk-averse tech industry to seek more mergers and acquisitions, according to M&A advisers.
In the first six weeks of the year there were 205 deals worth $9.1 billion as compared to 350 deals worth $7.98 billion in the entire first quarter of 2003, according to Michael Edelstein, assistant research manager for financial market researcher Thomson Financial. The ramifications of such an M&A uptick will play out through consolidation, corporate spending and hiring activity, according to M&A advisers and tech CEOs.
While this is part of a larger national trend, Silicon Valley also is ripe with M&A tech deals. Last month, Sunnyvale-based network equipment maker Juniper Network Inc. [Nasdaq: JNPR] acquired another Sunnyvale-based network security company, NetScreen Technologies (Nasdaq: NSCN) for $4.5 billion.
Such multibillion-dollar deals also are game-changing within their sectors and reflect the current M&A trend — companies seeking a strategic advantage with either product or technology enhancements, and acquiring engineering teams to build the next generation of products, says Dough Cogen, co-chair of the M&A group at law firm Fenwick & West LLP.
Cogen is his firm’s lead attorney representing Cisco Systems Inc. in San Jose. The network-equipment maker has acquisition plans for two companies in the security space. Last week, Cisco announced plans to acquire Cupertino-based Riverhead Networks Inc. in an all-cash deal valued at about $40 million. The transaction is expected to close in the second quarter of 2004. And Cisco already has acquired Mountain View-based Twingo Systems Inc. for $5 million in an all cash deal. Both acquisitions are directed at extending Cisco’s portfolio of network security offerings.
Internet messaging software provider Tumbleweed Communications Corp. (Nasdaq: TMWD) of Redwood City recently acquired Palo Alto-based anti-spam appliance vendor Corvigo Inc. for roughly $38 million in a stock-and-cash deal. Tumbleweed looked at 25 companies, mostly in the Bay Area that would enable it to expand into the Linux market and grow its distribution and revenue generation, before it settled on Corvigo, says Tumbleweed CEO Jeff Smith.
“Businesses such as ours have an improved corporate spending environment and are beginning to have more consistency in attainment of operating results and in raising the topic of M&A with their board of directors,” says Smith. “I think every company is for sale for the appropriate price.”
However, even during the bear markets of 2001 and 2002, M&A acquisitions in Silicon Valley and nationwide were continuing. At that time, Fenwick & West alone did about 100 M&A deals worth $10 billion. That compares to 2000 when the firm did the same number of deals but valued at $50 billion, says Cogen, who believes the figures indicate two sides of a coin.
“So, you can probably take either side — one, that M&A activity is consistent in the tech market, because as companies could not go public and the IPO window closed down, there was still some activity in the down market [after the tech bust],” he says. “Or, you can say, overall, there is an uptick with mega strategic deals and realignments taking place in the industry.”
The thought is echoed by Ron Lissak, managing partner and founder of San Francisco-based Catapult Advisors LLC. Lissak says he believes the media also is being influenced into believing in a larger M&A trend by big merger talks like Redwood Shores-based Oracle Corp.’s ongoing bid for Pleasanton-based PeopleSoft Inc.
“In Silicon Valley, there is a constant consolidation going on. It didn’t stop in 2000 or 2002,” says Lissak, noting that that people’s awareness of M&A deals ebb and flow. “As the recovery gathers steam, the number of deals has not increased nearly as fast as the average size of the deal, which is slowly starting to increase as stock market valuations of acquiring companies pick up,” says Lissak.
The middle market tech M&A deals — valued between $5 million and $250 million — have been going on year-in, year-out, according to George Von Geher, managing director of M&A firm Alliant Partners in Palo Alto.
About 80 percent of companies funded by VCs plan their exit strategy through M&As. In the past three years, 95 percent of VC-funded companies went through M&As because there was no IPO window, says Geher. Now the stock market is stronger, and big deals — $1 billion and above — signal to companies that it is time to become more aggressive.
The strength of activity in the middle market is from private equity groups that now are seeing financing rebounding to normal levels. And banks also are more interested in lending money to companies, says Robert Gurrola, president of San Jose-based Summa Financial Group LLC. Many M&As are strategic, and there is a strong belief that the economy is getting stronger, Gurrola says.