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Therese Poletti's Tech Tales
Sept. 30, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) "” To those of us who watch the technology business, it seems like money is burning a hole in the pockets of large high-tech companies.
Nearly every week seems to bring news of a new big deal, accompanied by daily speculation about who will be next. Companies like Oracle Corp. /quotes/comstock/15*!orcl/quotes/nls/orcl (ORCL 26.94, -0.23, -0.86%) , Hewlett-Packard Co. /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 41.79, -0.74, -1.74%) and IBM Corp. /quotes/comstock/13*!ibm/quotes/nls/ibm (IBM 134.04, -1.44, -1.06%) are doing deals at what seems like an unprecedented pace. And others are occasionally joining in: Cisco Systems Inc. /quotes/comstock/15*!csco/quotes/nls/csco (CSCO 21.78, -0.09, -0.41%) , Dell Inc. /quotes/comstock/15*!dell/quotes/nls/dell (DELL 12.76, -0.23, -1.77%) , EMC Corp. /quotes/comstock/13*!emc/quotes/nls/emc (EMC 20.18, -0.49, -2.37%) and Intel Corp. /quotes/comstock/15*!intc/quotes/nls/intc (INTC 19.22, -0.03, -0.13%)
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Which leads to the obvious question: Have these industry pioneers finally run out of options to expand their businesses naturally "” leaving them with little choice but to use their deep pockets to buy growth?
Since August, H-P has announced or completed four deals worth nearly $4 billion, including two private companies where terms were not disclosed. IBM announced or completed seven deals, worth a little over $2 billion, including four private companies. Most of the buys are focused on making the corporate data center more efficient, automated, secure and faster.
But according to data from The 451 Group KnowledgeBase of tech M&A, the number of deals so far this year is not approaching recent record levels. In the last five years, 2006 was by far the hottest, with 3,043 tech mergers and $370 billion spent by the third quarter, in a pre-meltdown stock market.
Data up to the third quarter of this year show 2,383 deals and $139 billion in total tech deal spending so far.
"We'll probably pass last year's deal flow," said Tim Miller, president of The 451 Group, in an e-mail. "But not likely to pass any other years in recent memory, despite all the perceived craziness."
So it's not a record year for tech deals. But there is something in the air, a major consolidation going on in technology, especially in corporate computing. At the dawn of the PC industry, companies bought software from vendors like Microsoft Corp. /quotes/comstock/15*!msft/quotes/nls/msft (MSFT 24.42, -0.08, -0.33%) , systems from computer companies like IBM or H-P and networking equipment from Cisco. Computer makers typically bought their own chips from companies like Intel or Advanced Micro Devices Inc. /quotes/comstock/13*!amd/quotes/nls/amd (AMD 7.10, -0.18, -2.47%) and storage from Seagate Technology /quotes/comstock/15*!stx/quotes/nls/stx (STX 11.77, -0.24, -2.00%) or EMC, depending on the system.
Now, everyone wants to be a one-stop shop, that one throat to choke for customers, the "vertically integrated solution" for all computing problems. Oracle Chief Executive Larry Ellison's comments last week that the company may be looking for a semiconductor company to buy sent the shares of a few chip firms flying. See chips stocks flying news here.
With all the deals are going on, are some companies buying too many things? It's like when you go clothes shopping get a great deal on a new shirt. But then you don't really have any shoes that go with it, so you buy some new shoes. Then you need a belt to complement the shoes and before you know it, you have doubled your spending, after you just set out to buy a new shirt. True shopaholics know what I am talking about. It's worth asking if some tech firms are opening up their wallets too fast.
Will any of these companies end up with merger indigestion, once they realize that integrating these big deals is never as easy as it seems? This could be a problem for H-P, which noted to analysts on Tuesday that it has spent $31 billion on deals since 2006.
Even Oracle, which prides itself on its efficient integration since it began leading the software consolidation wave in 2003, stumbled with its recent deal for Sun Microsystems. Oracle had to do more layoffs than it first predicted, and its plans for the SPARC chip family are still not all that clear to customers.
In August, Bloomberg reported that more than half the mergers in the last M&A boom were losers. According to its analysis of M&A data, 53 companies that did the biggest deals from 2005 to 2008 saw their stocks lag industry peers two years after doing mega-deals, though this analysis was not just limited to tech deals.
During H-P's analyst meeting Tuesday, top executives told investors of its plans to grow both organically and inorganically. Interim CEO Cathie Lesjak said H-P is increasing investment in research and development. But there's not a lot of evidence that it has invented anything of major significance in the last decade. She touted H-P's "sea of sensors" and its data de-duplication software for storage backup as recent examples, but those developments sound like evolutions of existing technologies.
Most of the tech giants seem to be relying too much on deals for growth. Indeed, H-P's slightly rosier 2011 revenue and earnings forecast is in part aided by its acquisitions. See H-P analyst meeting news here.
In this sense, the tech industry is starting to resemble other, mature industry groups that have learned to be content with single-digit growth and the occasional, elephant-sized acquisition.
Startups are important here to add new lifeblood to the sector. But the drawback of a merger wave is that entrepreneurs begin to see dollar signs and sign away their companies to these giants "” when sticking around and building tomorrow's Google might sometimes be a better option.
Deal-making is great for bankers and venture capitalists, but let's hope at least some promising firms can resist the temptations of a lucrative cash-out, so Googles of the future don't disappear into today's Microsoft.
Therese Poletti is a senior columnist for MarketWatch in San Francisco.
Therese Poletti chronicles the machinations of the technology industry for MarketWatch in the Tech Tales column. Before joining MarketWatch, Poletti covered some of the biggest companies in Silicon Valley for the San Jose Mercury News. Previously, she spent over a decade at Reuters, covering a range of beats, from spot news and Wall Street to biotech and technology. Poletti was also the lead reporter on teams at the Mercury News that won two Society of American Business Editors and Writers awards for breaking news and two Society of Professional Journalist awards. She was also a finalist for the Gerald Loeb Awards in the deadline writing category. Poletti is also the author of "Art Deco San Francisco: The Architecture of Timothy Pflueger," published by Princeton Architectural Press.
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12 min ago11:45 a.m. Sept. 30, 2010 | Comments: 1
- rearden215 | 6:44 a.m. Today6:44 a.m. Sept. 30, 2010
"Merger mania engulfs tech industry http://on.mktw.net/ar5zex" 11:37 p.m. EDT, Sept. 29, 2010 from tpoletti
"Will RIM eventually move to new software? http://on.mktw.net/cyt2LZ" 11:22 p.m. EDT, Sept. 27, 2010 from tpoletti
"No fireworks at Oracle's big user conference http://on.mktw.net/bR07k6" 11:09 p.m. EDT, Sept. 22, 2010 from tpoletti
"H-P likely looking for stability in new CEO http://on.mktw.net/cgAgZL" 11:10 p.m. EDT, Sept. 20, 2010 from tpoletti
"Startups bring big dreams to DEMO http://on.mktw.net/9YNUb9" 4:32 a.m. EDT, Sept. 16, 2010 from tpoletti
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