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Tech Merger Meter

December 23, 2004

Tech Merger Meter

Thursday, December 23rd, 2004
Megan Ballinger, Marcello Prince

THE PACE OF DEALMAKING quickened in 2004 as corporate profits improved and the U.S. economy stabilized. The value of announced deals targeting technology and telecommunications companies, excluding debt, eclipsed $361 billion -- up 75% from 2003, according to research firm Dealogic. The activity was led by Cingular's $41 billion purchase of AT&T Wireless in February and Oracle's hostile pursuit of PeopleSoft, which culminated in a $10.3 billion deal in December. The year ended with a flurry of big deals including Sprint's $36-billion merger with Nextel.

Observers say the tech sector remains poised for further M&A activity next year. "The stars may be aligning for a much-anticipated consolidation period across the tech landscape in 2005," a team of Goldman Sachs analysts wrote in a December report. "With cash stacking high on many vendors balance sheets, an optimistic macroeconomic picture, and an appetite among [tech buyers] to decrease their vendor lists, next year may lead to a further shakeout in techland, particularly in the software arena."

Tech M&A will continue at a rapid clip next year, market watchers say. Growth in corporate spending is expected to be modest, so mergers may be the best way for some firms to get new customers. Many sectors are fragmented and mature, making them ripe for firms flush with cash and looking for ways to boost sagging profits.

Ken Marlin, managing partner of Marlin & Associates, says improved tech spending will lead to M&A, especially among IT-services firms. "Buyers will be more willing to buy because their businesses are doing well, and they'll have money," he says. "Sellers will be more willing to sell because their businesses are doing well and they'll be able to get more for them."

David Parker, partner at Thomas Weisel Partners, says "there was a noticeable uptick [in merger discussions] about 18 months ago" and "a tremendous amount of the discussions have not yet culminated in transactions." He expects they will "culminate in coming year or the year after." He sees activity in wireless applications and telecom equipment.

Stephen Fraidin, partner at Kirkland & Ellis LLP, expects more hostile deals, following Oracle's successful pursuit of PeopleSoft. "Conventional wisdom in the tech industry has always been that you have to do a friendly deal," he says. "But Oracle was bold enough to make a hostile offer, and I think you'll see other companies willing to take that same risk."

Steven Cohen, chief investment officer at Kellner DiLeo Cohen & Co., expects to see more software mergers, but not necessarily more hostile deals. "Anything that involves intellectual property is hard to do," he says. "I don't expect to see [hostile deals] in software or in the broader tech arena because these industries rely so heavily on people and their creativity."

Paul Deninger, chairman of investment bank Broadview, says M&A is the only way for some tech firms to continue to grow rapidly. "Historically, the tech industry is used to double-digit growth," he says. And though that's not the case anymore, "the Street still expects it." He predicts more digital media and ecommerce deals.

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved.

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