A Quick Look at Technology Acquisitions in 2008

Tech companies start the year with an M&A push, but Microsoft could eclipse them all.

The progressively softening economy makes good fodder for op-ed columnists, but it doesn't seem to be affecting the always-lively mergers and acquisitions activity seen in the technology arena. People may not be buying houses anymore, but companies are sure keen on buying each other.

After a strong M&A year in 2007, the first few months of 2008 show that the trend hasn't abated quite yet. As an example of the pace of deals, there have been at least 35 mergers and acquisitions for venture capital-based technology companies so far in the past two months, noted Adam Wade, at Dow Jones Financial Information Services.

"Today's market is very similar to what we say in 2003 and 2004, when more companies were acquired, but for lower prices," Wade says.

Notable deals in the last two months have included: Sun snapping up desktop virtualization company Innotek; SGI buying Linux Networx, to expand its Linux capability for high-performance computing; and Dell announcing it will buy MessageOne, which provides managed services for email and business continuity.

"The last 12 to 18 months has been torrid," says Charles King, president and principal analyst at Pund-IT. "The shifts in corporate tax law under the Bush administration have made life profitable for many corporations, and the ones doing well have been sitting on a lot of money. And now they want to spend it."

Especially big is the announcement from Oracle that it will acquire BEA Systems, for about $8.5 billion, demonstrating Oracle's long-term interest in middleware.

Although there were a number of sizeable deals in just the first two months of the year, no company achieved quite the level of sound and fury that Microsoft demonstrated when it announced on February 1st that it was going after Yahoo.

Considering a potential proxy fight to replace Yahoo board members, Microsoft's takeover is likely to be decisive and swift, but it differs significantly from the behemoth's past deals, notes Rob Helm, an analyst at Directions on Microsoft.

"This is really an unusual move for Microsoft, both in terms of size of the acquisition, and the fact that it taps out all the company's available cash," he says. "It's not organized like any other kind of Microsoft deal."

Also unusual is the buy itself, he adds. In the past, Microsoft has purchased software companies like Great Plains, and then attempted to integrate application functionality from those firms into its larger portfolio. With Yahoo, the company is trying to compete with Google, and that could spark other deals in the coming year surrounding online services.

"In the tech world, it's fairly common to see large acquisitions like IBM and Cognos, for example," says Helm. "But when a company's core business is software and it buys an online services company, that says something about the acquisitions climate. It's kind of 'anything goes' right now."

As if to prove the point, Yahoo made its own acquisition announcement, just a day after rejecting Microsoft's initial offer. The company plans to spend $160 million on Maven Networks, a developer of inventory management and reporting tools, and an ad engine.

Although the economy may cause slowdowns in some sectors of technology, some analysts believe that acquisitions won't be particularly affected. If anything, the changeover in U.S. presidents could spark a buying and merging spree before the year is out, King notes.

"It's been a kind of unspoken thing, but there could be a large effect on M&A activity with a new presidential administration," he says, pointing out that anti-trust actions during the Clinton era were different than during the Bush tenure, for example. "Mergers and acquisitions tend to change according to who's in the White House, and that could make companies think they have to close on any new deals before the end of the year."

In addition to year-end scurrying, the industry could also see continued consolidation in areas like storage, security, middleware, and online services. Storage, in particular, has become so complex that it's something of a deal magnet.

"You don't just store information anymore, you have to find ways to manage it, and secure it, and move it around," says Roger Kay, president of research firm Endpoint Technologies Associates. "That means more companies are entering the market with little pieces of the puzzle, and bigger companies are acquiring them to put their services together."

Recently, the entire industry has seen fewer deals coming from private equity firms than in the past, which could be beneficial for enterprise application vendors who wouldn't have to compete with the firms for acquisitions, says Albert Pang, an analyst at IDC.

Hewlett-Packard is expected to play a more active role in software consolidation, he notes, and also look for more team-ups in areas like telecom, healthcare, and software as service vendors. "There are a growing number of mergers and acquisitions in all software segments," he says. "2008 should be no exception."