Between a volatile stock market and an IPO market that has become a virtual wasteland, tech companies are finding that potential suitors are in short supply.
U.S. tech mergers and acquisitions have steadily fallen from this year's peak of 514 in March to 231 this month, a level not seen since early 1999, according to Thomson Financial/Securities Data.
"When the markets corrected in April, it caused everyone to pause," said Bob Thornton, managing director and head of West Coast technology mergers and acquisitions for Deutsche Banc Alex Brown.
"The volatility and uncertainty doesn't lend itself to executives taking bold moves. They take a wait-and-see approach. And investors in this environment are less willing to embrace and less receptive to acquisitions," said George Boutros, managing director and head of global technology mergers and acquisitions for Credit Suisse First Boston.
The balance between buyers and sellers also shifts, he said.
"In this environment, there are more companies that are willing to be acquired, especially when the IPO markets are shut down or the window is barely open like it is now," Boutros said. "Unfortunately, it takes two to tango, and we have more sellers than buyers."
Sectors struggling to line up potential buyers are often the same ones that have encountered difficulty floating out an initial public offering. Business-to-consumer e-commerce companies, IT services, some segments of data services, and select areas of the business-to-business e-commerce arena have all faced a tough time attracting suitors, bankers said.
Ironically, some sectors that have garnered strong IPO performances are the same categories where companies are looking to sell their operations.
"If you overlay the advantages of doing an M&A--like accelerating time to market, expanding the customer footprint or a broader resource to draw on--it can be very compelling to do an M&A, regardless of the financial benefits of an IPO," said Nicholas Osborne, managing director and head of West Coast technology mergers and acquisitions for Morgan Stanley Dean Witter.
Optical, semiconductor, Internet infrastructure and wireless companies are experiencing strong acquisition activity, Osborne said.
Bankers also noted that it is the large tech companies that tend to search for the discounted deals, snapping up niche players that can provide a strategic piece of the puzzle.
As the markets have tanked and the landscape for mergers and acquisitions has deteriorated, a number of sellers are negotiating out of desperation for capital, rather than from a position of strength.
Some of these companies, such as beauty e-tailer Eve.com, never find a buyer and end up closing their doors. Others get picked off at deeply discounted rates for either their parts or their pared-down operations. For example, HealthCentral.com acquired some of online drugstore More.com's assets and its subsidiary for $6 million.
Smaller players are also using this period as a time to acquire mass, as Paytrust did with its acquisition of competitor PayMyBills.com. Last April, PayMyBills withdrew its plans for an IPO, citing market conditions.
And when might the tech mergers and acquisitions market see a reprieve?
"When the markets find stability, the M&A market may pick up," Boutros said. "But the stock market is just one issue. There is also the issue of the health of the companies.
"If business fundamentals actually deteriorate, we may see acquirers less willing to effect acquisitions. We have seen a lot of quarterly warnings recently, like Intel and Lucent. However, if the business environment is healthy and robust, and if the markets reach a level of stability, we will see a resumption and pickup in the level of M&A activity."