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TheStreet Open House

Big IT Vendors Turning To Mergers To Help Take On Cloud

By Patrick Thibodeau

Hewlett-Packard Co.'s $13.9 billion acquisition of Electronic Data Systems in late-August 2008 was one of the last big tech mergers to close before the latest recession fully arrived.

Less than a month later, HP announced plans to lay off about 25,000 former EDS workers, Lehman Brothers filed for bankruptcy, and the market fell 504 points -- all on the same day, Sept. 15, 2008.

After that miserable and operatic day, the tech industry entered a new, rarely seen era: It temporarily slammed the brakes on mergers and acquisitions.

In the first quarter of 2009, the value of tech industry deals shrank to $3.1 billion, a pittance compared to a normal quarter over the years, according to New York-based consulting firm PricewaterhouseCoopers (PwC).

Now it appears that tech mergers are back, and analysts see them continuing -- at least for the time being. Andy West, a principal in McKinsey & Co.'s merger management practice, predicts "a coming wave" of acquisitions because the number of public companies is relatively high and today's average sale price for public companies is relatively low.

West said that cross-segment acquisitions, such as a storage firm buying a networking company, are most likely. Overall, he noted, the technology market "continues to be ripe for consolidation."

But there are mixed reviews -- and some worries -- among users and analysts about latest merger trend. Users, in particular, see a risk that the mergers will stifle competition and could lead to vendor lock-in. But some also also see the emergence of cloud computing as a potential means of escape from the clutches of the growing-by-acquisition major vendors.

The pace started picking one year to the month after HP disclosed its EDS layoff plans. In back-to-back September 2009 announcements, Dell Inc. agreed to buy Perot Systems Corp. for $3.9 billion and Xerox Corp. agreed to buy Affiliated Computer Services Inc. for $6.4 billion.

And in April of this year, HP closed a deal to buy networking firm 3Com Corp. for $2.7 billion .

Tech merger spending had jumped to $21.3 billion in the 2009 fourth quarter, and the pace continued into 2010, with $19 billion in deals in the first quarter, according to PwC.

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