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Oracle's Bid Hasn't Brought Merger Mania

That lack of a clear direction may reflect in part broader M&A trends. Peterson noted that September 2004 was a particularly weak month for mergers and acquisitions, with only $30 billion worth of deals announced -- the lowest level since May 2003. Overall, this year looks to be stronger than last year, with about $700 billion in deals compared with $530 billion last year. But that's still a far cry from the $1.6 trillion worth of transactions in 2000, although one-tenth of that was the AOL-Time Warner deal, Peterson noted.

The high-tech sector enjoyed the largest number of M&A deals in every quarter this year, but the total overall value of those deals has been surpassed by other sectors such as financials, which has seen some big banking deals.

But Ken Marlin, managing partner of New York-based investment bank Marlin & Associates, said he has seen a pickup in the pace of software deals in the middle market, which he defines as transaction sizes less than $1 billion. (The four deals that have been announced this month fall into that category.) That's also an area where Microsoft, the world's largest software maker, has said it will set its sights, although CFO John Connors recently suggested that Microsoft may make some larger acquisitions. (The company's biggest deals in the past few years have been in the $1 billion range.)

Marlin said he expects the pace of middle-market software M&A activity to continue to increase, though not wildly, for two reasons: First, buyers in the past 12 months have become more confident about their own businesses. "They have cash and they're willing to take a risk," Marlin said.

By contrast, after the market crash in 2000, companies became more inwardly focused and risk-averse, he noted. Back in 2000 and 2001, sellers were willing to sell but then the market dried up, their business prospects slowed and eventually they became less willing to sell because they couldn't get the value they thought they were worth, Marlin said.

The second reason for an expected pickup in activity, Marlin said, is that sellers also have started seeing their businesses doing better and purchase multiples go up. "In that context, there are more people willing to be sellers," he noted.

But Shagrin sees companies' improved health as a reason he doesn't expect to see a big acceleration of M&A, because acquisition targets also are flush with cash and consequently feel little pressure to merge.

Consider, for instance, the balance sheets of some companies that have shown up on Oracle's list of potential targets: BEA still has more than $700 million in cash on its balance sheet; Siebel has more than $2 billion in cash and short-term investments; and Lawson has $112 million in cash and cash equivalents.

Software Winners and Losers
The biggest companies are expected to gobble up smaller point players as the software sector consolidates
Targets Acquirers
BEA Systems Computer Associates
Borland Software Microsoft
Internet Security Systems Oracle
Lawson Software SAP
McAfee Siebel Systems
QAD Symantec
Siebel Systems
Sources: Analysts, Oracle, Siebel Systems.

ThinkEquity's Josephson agreed that sellers are still suffering plenty of what he called "valuation delusion." "I think the biggest impediment to deals getting done is people being unrealistic about what buyers can do," he said.

Yet buyers, while more optimistic than they were about their businesses, remain far more cautious about acquisitions than during the go-go days.

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