If technology companies ranging from software powerhouse Oracle to fast-growing Net hotshot Skype could share a motto, it would be that oft-ridiculed fast-food pitch. On Monday, Oracle announced itfor $5.8 billion. The same day, online auctioneer eBay announced for $2.6 billion in cash and stock.
"We're seeing larger and larger deals come through," said Richard Peterson, a market strategist for Thomson Financial, a financial data provider. "The average deal size is over $35 million this year for tech companies big and small, and that's more than double the $17 million in 2002." Last year, the average deal size was nearly $25 million.
The eBay and Oracle deals added to the roughly 3,000 tech mergers announced in the first nine months this year, according to Thomson Financial. While the number of deals is down in comparison to the same period last year, the total value of all deals this year, excluding assumption of debt, is $109.9 billion--a 50 percent jump over the first nine months of last year.
While tech companies, stuck for several years in risk-averse mode after the dot-com bust,that were unlikely to hurt the bottom line, they're spending big now. So far this year, 11 companies have announced deals worth $1 billion or more, excluding debt, according to Thomson Financial.
So what gives?
"Everyone in the software space wants to be twice as big," said Kevin Sidders, who heads up the software banking business for Credit Suisse First Boston's U.S. technology group. "A $20 million company wants to be a $40 million company, and a $10 billion company wants to be $20 billion."
Two issues are coming into play, particularly for software companies, Sidders said.
Chief executives are glomming on to the notion that the growth of the IT market, at least as they know it today, will more or less mirror the growth rate of the U.S. Gross Domestic Product (GDP) in the foreseeable future. The U.S. GDP grew at an annual rate of 3.3 percent in the second quarter, according to the Bureau of Economic Analysis.
The growth-rate reality
That's a far cry from tech's glory days. Even before the dot-com boom, the high-tech industry grew better than 9 percent a year. But the industry is now so big that, with the notable exception of hot sectors such as security and Internet search, it's hard to keep that kind of growth going, even in a healthy economy.
A second issue is the relationship between the size of a company's revenues and its operating profit, Sidders said. In Silicon Valley these days, the bigger the company, the higher the profit. With discount pricing pressure in nearly every tech sector, a giant company has a better chance to spread costs around and maintain healthy sales margins.
And that, according to Sidders, is causing a jump in large deals.
"People used to think, 'Where is my product road map going?' and buy a company based on that road map," Sidders said. "Now, they're doing more financial strategic acquisitions, rather than ones that are more strategic to their business."
Oracle's $10.3 billion acquisition of another rival, PeopleSoft, announced in June 2003, was one of the first deals that reflected this mindset shift, he said. It was much more of a "financial" deal, as Sidders puts it, than a strategic, technology-driven move.
Oracle CEO Larry Ellison for years has been arguing that his industry is maturing and ripe for consolidation. Only a giant company will be able to maintain profits as new customers become harder to find, Ellison theorized. After the Siebel deal closes,