Tech Mergers: What to Expect

Google long ago became more than just the name of an Internet search behemoth and turned into a verb synonymous with the company’s core specialty. Now Yahoo–Google’s chief search competitor–also finds its brand name redefined. Asked in early March if his firm had any plans for a major acquisition, IBM chief executive Sam Palmisano replied, “We would not do a Yahoo.”

He was referring, of course, to Microsoft’s hotly contested $44.6 billion takeover bid for Yahoo. IBM, like other tech giants, is no stranger to mega- and micro-acquisitions, but did Palmisano’s tone–coupled with fears of a recession–indicate a new era of dampened enthusiasm for deal-making in the tech sector?

Despite the notes of caution, some smart money says the technology industry’s match game is alive and well. Mergers and acquisitions (M&A) in technology and telecommunications came in at about $200 billion last year, according to the 451 Group. That was down dramatically from 2006, when they saw $350 billion in activity. But overall deal flow was up in 2007, thanks to substantial private-equity buys.

Now, however, the credit crisis has emptied that well, putting big companies back in the driver’s seat. “Corporations have the upper hand–they’re not bidding against private equity, and no one’s going public,” says Brenon Daly, a financial analyst with the 451 Group. “They’re going to push to do deals.”

He anticipates the tech M&A market growing from last year’s total but not quite reaching the 2006 high. Much will depend on how long the economic slump continues: While many companies banked solid fourth-quarter gains in 2007, a prolonged slowdown could cut into their buying power.

So far, the economic crisis hasn’t deterred some of the biggest tech firms from striking multibillion-dollar deals. In January, Oracle completed an $8.5 billion hostile takeover of BEA Systems, while Sun Microsystems snared open-source database firm MySQL. The following month, IBM swallowed business intelligence firm Cognos in a $5 billion deal. In March, European Union regulators signed off on Google’s $3 billion bid for online advertiser DoubleClick.

Oracle CEO Larry Ellison–the most aggressive of Silicon Valley buyers–said M&A is a necessary function of corporate growth. “It’s crazy to say you will only grow through innovation,” Ellison told The New York Times. “It’s bizarre that there’s a stigma to buying something rather than building it yourself.”

Daly of the 451 Group says long-entrenched companies like Oracle and IBM, which produce at least $1 billion in cash flow a month, will be prime potential buyers. “A lot of these old-line tech companies are realizing it’s their game to lose as the platform changes,” he says, referring to the shift from the desktop to newer technologies like search and Web-based applications. “They profited from that last transition, and they don’t want to lose out from the next one.”

For enterprise customers, M&A can create a number of possible outcomes. Loyalty to vendors can die when they’re acquired by a bigger firm. Businesses can see a drop-off–or a boost–in service and relationship management. When acquirers have problems integrating newly acquired technologies into their offerings, more customer defection can occur. With a growing dependence on newer offerings in Web 2.0 and software as a service, IT leaders need to carefully consider the future implications of investing in technologies that could quickly be snapped up by bigger, more traditional tech firms.

The bottom line: CIOs can be sure more consolidation is on the way in their vendor communities. And in the near term, chances are the buyers will be some very familiar names.

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