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10 Deals the New Year May Bring

December 2005

NEWS ANALYSIS
By Steve Rosenbush  

10 Deals the New Year May Bring  

Time Warner sells AOL? Yahoo grabs Netflix? SBC connects with BellSouth? They're just some of the possibilities investors should be watching for in 2006  

December 28, 2005.

A powerful wave of mergers and acquisitions surged through the economy in 2005, and the tide is likely to gather even more power during the year ahead. The volume of M&A activity broke the $1 trillion barrier for the first time since 2000, soaring 46%, to $1.21 trillion, from $824 billion in 2004, according to researcher Thomson Financial (see BW Online, 12/6/05, "M&A: Back with a Vengeance"). Many bankers believe 2006 will bring even more deals -- and at a faster pace, although M&A activity is still only at around 1997 levels. The momentum will be particularly apparent during 2006 in media, technology, and telecom, those who follow M&A say. New technology is forcing a fundamental redefinition of these industries. High-speed Internet access, mobile networks, flat-panel TVs, personal video recorders, and software innovations such as Google (GOOG) search and Microsoft's (MSFT) Xbox 360 gaming platform are shaking things up.

CRYSTAL BALL. Organic growth won't cut it in these three sectors. Companies will have no choice but to enter new markets and spin off old businesses in order to keep pace. So mergers and acquisitions will be a crucial tool for companies. "The tech world is in the midst of a significant consolidation," says Ken Marlin, managing partner and found of Marlin & Associates, a media and tech-oriented investment bank in New York. "We think 2006 will be even stronger."

Of course, no one knows exactly which companies will get together, which will spin off key units, or when those deals might be announced. Even the bankers and executives involved in particular talks must deal with uncertainty until the last signature is signed. But here's a look at 10 M&A moves that would seem to make the most sense in the converging world of telecom, tech, and media next year:

Media

Time Warner spins off AOL.
Now that Google has sealed a deal to buy 5% of Time Warner's AOL unit (see BW Online, 12,21,05, "AOL-Google: Who Gets What"), is a greater restructuring of the giant Time Warner media empire is at hand? Shareholder activist and investor Carl Icahn is pushing for a breakup. Analyst Marlin thinks the evolving picture will lead to an AOL spin-off in 2006.

"Time Warner has quieted no one with its partial deal to sell a piece of AOL to Google. That was a tactical deal, not a strategic one," says Marlin. "We expect to see AOL spun off into a separate, publicly traded company, with Time Warner retaining a majority stake -- for now." Any of the big Internet portals that fought over AOL in 2005 might want to acquire it. They include Google, Yahoo! (YHOO), and Microsoft's (MS FT) MSN unit.


• Yahoo snaps up Netflix
Portals such as Yahoo are speeding into the media business and the telecom business all at once.

Yahoo has developed its own Internet gaming and Internet music sites, and Marlin thinks it will move deeper into the online-entertainment and social-networking markets, which makes Netflix (NFLX) mighty attractive.

"We think Netflix is a likely candidate for them," says Marlin. Netflix has built a huge following by allowing members to rent DVDs online, the movies then being sent by snail mail to their homes. But in an era when Internet rivals have untold scale, it might not make sense as a stand-alone business.


•Fandango finds a home with Yahoo, with AOL waiting in the wings as a second suitor
The growing movie-ticketing service could help Yahoo compete with AOL's Moviefone service. But AOL might prefer to buy Fandango, thereby eliminating a top rival.

Telecom

• An SBC-BellSouth (BLS) hook-up?
Now that telecom giant SBC has finished its acquisition of AT&T, it may take a serious look at BellSouth, the biggest of the remaining potential Bell targets. Tiny in comparison with rivals SBC and Verizon, BellSouth would make a good fit with either company.

But SBC has the edge, for it has an existing venture with BellSouth's wireless unit, Cingular. Investment bankers caution a Verizon-BellSouth deal would trigger tax complications -- complications that SBC doesn't have to worry about. That's because Verizon already has its own wireless network, and would likely want to spin off the wireless interests of BellSouth, making a tax-free merger all but impossible.

• Qwest breakup
Qwest (Q) is the smallest of the Bells. It tried to buy MCI, but lost that bid to rival Verizon (VZ). Now it's struggling to find another potential partner that makes as much sense. The reason: A merger with MCI would have spread Qwest's considerable debt over a much larger revenue base, thereby improving its financial outlook. So telecom bankers expect Qwest to be dismembered.

SBC would be a logical buyer for Qwest's larger markets, which include Denver. A private-equity investor might be willing to take on the remaining rural phone networks. And Qwest's long-distance network is likely to be shut down, bankers say.

• Local lines cross for Sprint and Alltel
Sprint Nextel (FON) is looking to spin off its local phone business, and Alltel is looking to do the same in order to focus on wireless. Linking up these two local-phone units would make sense as a consolidated national player in a niche market. And they might even be interested in some of Qwest's business, if that company breaks up.

• Verizon buys Alltel wireless
Verizon was the No. 1 wireless outfit in the U.S. until Cingular bought AT&T Wireless. But Verizon may catch up on its own. One way to accomplish that quickly: Acquire the Alltel wireless business, which uses the same digital technology. Analysts point out that such a move would help Verizon move solidly back into the lead.

Tech

• Lawson Systems and Oracle
Always-hungry Oracle (ORCL) spent $10.3 billion on 13 acquisitions in 2005. Is it finished? Not likely. It may want to continue the spree with enterprise software maker Lawson (LWSN), which is well-positioned in the growing market for business-process software. Buyers of Oracle's software increasingly want to know how to integrate technology into their companies in ways that make the most business sense. If Oracle doesn't buy Lawson, IBM (IBM) or SAP (SAP) might, for the same reason.

• Business Objects and IBM
As the software market continues to consolidate, smaller players like business intelligence leader Business Objects (BOBJ) might make a good fit for IBM. Even if IBM doesn't take the bait, Oracle or SAP might.

• BEA Systems gets gobbled up?
Here's another small enterprise-software player that would bring value to a larger company's offerings. It would be a nice fit with any of the larger software players, including IBM, SAP, and Oracle.

Informed speculation? Yes. But the forces that led to consolidation in 2005 will remain in force for 2006. And as technology breaks down the barriers between media, telecom, and tech, the pressure for companies redefine themselves will escalate. That's something investors can bet the farm on next year.  

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