Hardware vendors top M&A list

Hardware deals were the hottest sector for high-tech mergers and acquisitions during the first six months of 1997, according to a survey of information technology activity from investment bank Broadview & Associates.

Big high-tech firms have realized they can't build new technology fast enough to keep up with rivals, so they buy it, said Broadview chairman Charlie Federman.

"Mergers and acquisitions are now an accepted component of a corporate growth or survival strategy," said Federman. "You cannot cover all the research and development to be an effective competitor today through internal growth. To keep pace with customer demand and competitive imperatives, that is no longer an option."

Among hardware deals, eight transactions were valued above $1.1 billion, topped by the megamergers of 3Com (COMS) and US Robotics ($6.5 billion) and Ascend Communications (ASND) and Cascade Communications ($3.5 billion).

Overall, IT mergers and acquisitions in North America were up 20 percent from the 1996 period, totaling 1,177 in the first half of 1997 compared to 980 deals announced in the first half of 1996.

The media and information services category showed the biggest increase in the number of transactions, climbing 38 percent from 187 in 1996's first half to 258 this year.

The jump in media-related acquisitions reflects Federman's view that media companies have only recently acknowledged that they are allied with the IT industry. Citing Microsoft's acquisition of WebTV Network and its $1 billion investment in Comcast (CMCSK), he said successful firms in the convergence of media and technology are highly attractive buyout candidates.

"There's a fundamental change in media companies, moving from print and CD-ROM into the network world. These guys' mindsets have to move from a product to a service," he said.

Despite eight buyouts each working day in the first half of 1997, North America's high-tech industry is not consolidating, Federman said, because initial public offerings (IPOs) and new companies are being launched at a rapid rate.

And, because of the merger craze, larger companies are now growing faster than small ones, he said, although not on a percentage basis.

"We're seeing a concentration of power," Federman said. "Microsoft did 20-plus transactions last year. Companies are utilizing their balance sheets and market capitalization to accelerate growth. They're using their size to attain competitive advantage."

High stock prices play a big role in the buyout binge, he added, particularly in terms of the dollar value of transactions. By making acquisitions with stock not cash, buyers can afford to pay higher prices.

Broadview Associates is an investment banking firm that advises technology, telecommunications, and media industries on corporate finance issues, including mergers and acquisitions.