Bargain Prices Fueling Tech M&A

SAN FRANCISCO -- The financial storm has sowed panic on Wall Street and frozen all manner of business activity.

Yet tech firms are still opening their wallets and shopping around.

A slew of Silicon Valley's marquee names have announced sizeable acquisitions in the midst of the crisis -- reflecting the dealmaking advantages that tech firms have in the current environment and raising questions about the firms' prospects going forward.

Among the most recent deals are Symantec's ( SYMC) $695 million bid for MessageLabs, Hewlett-Packard's ( HPQ) $360 million bid for LeftHand Neworks and eBay's ( EBAY) $1.3 billion to snap up a trio of companies.

In the three weeks since Sept. 15, when the financial crisis began its latest and most destructive phase, a total of 105 M&A deals were announced by U.S. tech companies, according to the market research firm Dealogic.

That's an increase from the three-week period immediately prior to the turmoil, when only 77 tech deals were announced, and it's up from the 99 deals announced in the comparable period one year ago.

Whether or not that uptick proves to be a statistical aberration -- after all, tech M&A deals in the first nine months of 2008 are down 35% year over year -- it appears at the very least that the anxiety suddenly infecting the financial markets has not spelled the end of dealmaking for tech companies.

"Regardless of what's going on in the financial marketplace, tech M&A is a function of the growth and the creativity" of the business, says Roger Aguinaldo, managing director of Forest Hills Capital Management and publisher of M&A Advisor.

"It's an extremely competitive industry, and that's why you're going to get a lot of M&A in this industry," he says.

The stock market's plunge in recent weeks has pushed share prices for many companies to multiyear lows, so plenty of attractive companies and assets are available at bargain prices.

And tech firms are particularly well-positioned to take advantage of those opportunities.

Because tech firms don't typically rely on debt to finance acquisitions, they're less affected by the recent freezing-up of credit markets.

It's true that stock may be out of favor as a transaction currency these days, but dividend-shy tech firms tend to have healthy reserves of cash to deploy.

The tech firms best-positioned to go shopping have high working capital ratios and little debt on the balance sheet, notes Aguinaldo.

To judge by some of the recent acquisition offers, buyers are taking advantage of low prices to go after everything from complementary businesses to specific assets.

Microchip Technology ( MCHP) and On Semiconductor ( ONNN) teamed up to make an unsolicited offer for Atmel ( ATML) earlier this month, with each bidder eyeing a particular product line of Atmel's and stating their intent upfront to unload everything else.

By contrast, Samsung's unsolicited bid for SanDisk ( SNDK) looks to be primarily a an attempt to get hold of the chipmaker's coveted intellectual property for the flash memory chips that have become integral to cell phones, MP3 players and other consumer electronics. While Samsung is the world's No. 1 producer of flash memory, it currently pays SanDisk hundreds of millions of dollars a year in royalties related to the technology.

Analysts believe Micron's ( MU) rumored interest in Qimonda ( QI) -- a deal that neither company has actually confirmed is in the works -- may be a way for Micron to snap up Qimonda's chip factories on the cheap. Qimonda is currently trading at a fraction of its book value.

Companies may be looking each other over, but it's hardly an M&A boom.

Tech firms are still vulnerable to the same economic forces threatening other businesses, and that's tempering the appetite for deals somewhat.

Andy Rappaport, a partner at the venture capital firm August Capital, says deals are getting done when it makes strategic sense, but he describes the overall deal market as "soft," particularly for privately held startup companies.

Many tech companies are wary of adding new teams or taking on a money-losing operation at a time when the market is fraught with so much uncertainty, says Rappaport.

And it's no secret that startups have slim chances of raising money through an initial public offering right now. As a result, he says, there's less competitive pressure on buyers to pounce on an interesting company or to pay a high price to acquire a company.

The transactions that do occur are more difficult and drawn-out than in the past, says attorney Douglas Smith, a partner at Gibson, Dunn & Crutcher.

"People are spending a lot more time thinking about it, doing diligence and structuring a deal in ways to protect from the downside," says Smith. One particular area of focus: the conditions under which parties can terminate a deal.

"What you see is just a lot more time spent trying to get something that both sides can live with," says Smith.

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