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, he'll have spent in excess of $16.7 billion over the last two years to back up that theory.
Oracle's hostile takeover of PeopleSoft forced executives at other companies to think long and hard about their futures as well, and sparked a wave of big-ticket mergers. Security software maker Symantec topped them all when it spent $10.5 billion in an all-stock deal to acquire storage software maker Veritas.
Symantec CEO John Thompson argued that even his fast-growing company--which has been acquiring small businesses at a steady clip for years--had to think big if it was going to thrive years from now.
Ultimately, the deal may indeed prove to be a lot more strategic than financial. Most security experts figure it's only a matter of time before Microsoft competes head-on with Symantec for antivirus software sales. It's already selling antivirus software for corporations through its Sybari subsidiary. Thompson, his fans believe, was wise to use the dividend of today's sales to get his company into a new market.
Big telecoms, too
But big-ticket merger mania has hardly been limited to software companies.
The telecommunications industry, which faces additional regulatory pressures and direct competitive threats from the cable industry, has been a hotbed of large deals., SBC Communications' and each reached into the billions of dollars.
But are companies that interested in selling themselves?
When it comes to private, venture-backed companies, the answer over the past 12 to 18 months has leaned toward "heck, yes." Even a company like software maker VMware, which was considered a hot prospect for an initial public offering, took the easy money and sold to storage giant EMC for $625 million in cash last year. Another strong Wall Street candidate, Crystal Decisions, rescinded its IPO in 2003 and was acquired by rival Business Objects in a $1.2 billion deal.
"We're seeing private companies say that they could go public, but an M&A transaction would be just fine," said Cole Bader, a partner in the mergers-and-acquisitions group at Thomas Weisel Partners.
Several big factors are weighing on that. Continued stock market uncertainty makes an IPO a high-risk move for all but a few companies like Google and Salesforce.com. Increasingly, investors are happy to cash out in an acquisition. They may not make as much money as they would in an IPO, but an acquisition is a lot less risky. Also, venture capitalists are under more pressure to show some returns for their own investors, and a merger is an easy way to do it.
And big companies, most notably in security, have a habit of gobbling up start-ups with hot technology that otherwise would have taken years to develop.
"There's a joke in our market that every successful IPO is a failed M&A trade," Bader said.
Venture capitalists, such as Tim Draper, of Draper Fisher Jurvetson, note that some of the start-ups his firm has funded, such as Skype, which created a peer-to-peer network for voice over Internet Protocol (VoIP) communications, have opened new markets that large corporations want to get into. And after years of playing it safe, executives at many big companies figure they need to go the merger route to land important new technologies.
"After the boom and the bust, people froze and stopped investing," Draper said. "Large corporations were also working with frozen R&D (research and development) budgets. Now the large corporations are realizing that they need to evolve."
Industry observers are expecting the large buyouts to continue to rise, especially given the inquisitiveness of, , , and, of course, .
"Maturing companies are buying companies like Skype," Thomson Financial's Peterson said. "Microsoft is on the prowl; Cisco is on the prowl. You have these 800-pound gorillas scouring the territory."