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Foreign firms increasingly eye U.S. tech companies

Last month's $12 billion deal that handed U.S. Web portal Lycos to a Spanish company marks the most recent example of foreign companies on the prowl for U.S. tech firms.

Last month's $12 billion deal that handed U.S. Web portal Lycos to a Spanish company marked the most recent example of a growing trend: foreign companies are increasingly on the prowl for U.S. tech firms.

So far this year, 271 U.S. tech firms have been acquired by overseas companies, double the rate during the first five months of last year, according to Thomson Financial Securities Data. This performance builds on the previous five years, in which annual growth rate has ranged from 8 percent to 66 percent.

Henrik Aslaksen, a managing director of technology mergers and acquisitions for Merrill Lynch in the United Kingdom, said the attraction of U.S. technology companies is fairly simple: "The U.S. is the hotbed for technology."

In particular, large telecommunications companies, such as Telefonica in Spain and Deutsche Telekom in Germany, are expected to increasingly snap up U.S. content and services companies to bolster their Internet presence, investment bankers say.

Deutsche Telekom, for example, recently said it plans to ramp up its international expansion efforts after a failed bid to acquire Telecom Italia. Some of the areas it plans to pursue include Internet services.

Vodafone was rumored to be interested in Lycos, but the U.K. company may now seek other acquisitions such as EarthLink, said one banker. Lycos was purchased last month by Spanish Internet service provider Terra Networks in a $12 billion deal.

Stuart Francis, head of the global technology group for Lehman Brothers, said access and networking companies may be particularly ripe for acquisition by foreign firms.

"As many companies try to put together ISPs and Web hosting companies, there is a need for global access and networking," he noted. "That is where I think we'll see more deals, rather than the destination sites.

"We think it's a continuing trend," Francis said. "We're fielding a lot of questions from our clients in Europe as it relates to the U.S."

In addition to European suitors, Asian firms can also be expected to make some acquisitions. And in India, large IT services companies such as Infosys Technologies are looking for acquisitions, said Karl Will, who oversees technology and Internet mergers and acquisitions for Deutsche Banc Alex Brown.

He added that Pacific Century CyberWorks, which operates a satellite and cable system that reaches 110 million potential viewers in Asia, is trying to leverage its system by offering content.

Investment bankers also note that large foreign companies with a presence on the U.S. exchanges are the players most poised to take advantage of cross-border acquisitions. That is because they can offer a type of currency, U.S. dollars, that the target company already uses.

While the number of foreign companies snapping up U.S. businesses is on the rise, investment bankers say they do not expect a surge in such deals just because of the downtrodden stock market.

The vast majority of deals this year, for example, occurred in the first quarter when stocks were still riding high. During the quarter, 182 deals were announced--a 168 percent increase from the previous year. But from April though yesterday, 89 deals were announced--a mere 33 percent increase from the same time last year.

One banker noted that while the declining markets have made some see special coverage: Lycos bought in billion-dollar dealU.S. Internet companies far more affordable, shareholders in these U.S. companies are more leery these days of accepting buyouts based on possibly overvalued foreign shares.

Terra Networks' shares, for example, soared more than threefold last November when its IPO debuted. The company's shares hit as high as $54.50 before finishing its first day at $38.25. The shares closed yesterday at $42.38, down $1.63 points.

"The Terra and Lycos deal was more than just a straight stock deal," said a banker, who noted this type of deal is not likely to be repeated anytime soon. "There (also) were revenue commitments from Bertelsmann."

The German publishing giant had a letter of intent with Terra's major shareholder, Telefonica, in which the combined Terra Lycos and media giant would form a joint venture to create online media stores in Spain. Under the deal, Bertelsmann said it would pay $1 billion in advertising over the next five years and be the preferred media partner.