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The new normal
Honey, I shrunk the VCs
Antitrust 2.0
The other exit
Many technology M&A bankers share Carmel's outlook, though
cautiously. With stock valuations leveling to some degree, a market for
initial public offerings that is taking tentative steps forward and
certain technology markets that are ripe for consolidation, acquirers,
targets and their advisers have begun to realize that they are dealing
with a more stable, though still challenging, new reality.
"When the shit storm happened in October, a lot of companies put
their heads in the sand to let that storm blow over," says Rex Sherry,
a partner with America's Growth Capital LLC and co-head of the
Boston-based firm's West Coast investment banking. "Now they see that
the storm hasn't necessarily blown over, but we're not heading into the
abyss either."
The raw numbers so far this year haven't been particularly
promising. Last year, 2,670 technology deals -- excluding
telecommunications M&A transactions -- worth an aggregate $142
billion were struck, according to data from the 451 Group. As
of late May, 989 transactions valued at a total of $32 billion have
been announced. While the number of deals is on track to be comparable
with last year's, the last few months of 2008 saw a precipitous
drop-off in that tally, thanks to the succession of financial disasters
that rocked the market. And so far this year, the average price tag of
a deal has been cut nearly in half compared with last year.
Certainly, the dealflow this year has been accentuated by some
large, significant transactions, prompted not only by low stock prices
of targets, but by overarching trends in technology development and
large corporations' need for new growth avenues. Different technologies
in the corporate data sector have been converging, and the turf war to
supply those technologies led Oracle Corp. in April to an agreement to buy Sun Microsystems Inc. for $7.1 billion.
There's no doubt that the past several months have presented
opportunities for buyers, at least theoretically. According to recent
research from Boston Consulting Group, acquisitions in a
downturn provide shareholders with returns 14.5% higher than those in
deals struck in rosy economic times. But the problem has been agreement
on valuations. The deep freeze in the last quarter of 2008 has created
a dearth of comparable transactions to help value a deal.
Couple that with the volatility of stock prices, and it has been
extremely difficult for buyers and sellers to agree on a price.
"The biggest issue has been understanding valuations in a vacuum,"
says Jason Hutchinson, managing director of M&A and the head of Houlihan, Lokey, Howard & Zukin Inc.'s global technology group.
Not only have sellers been wary about being undervalued, but buyers
have been extremely cautious -- some might say paranoid -- about any
surprises that might crop up in a target.
"Everybody is so risk-averse that you have to labor very hard if there is any imperfection," says Chad Keck, vice chairman of Needham & Co. LLC.
Keck, who runs the New York investment bank's Menlo Park, Calif.,
office, tends to represent selling companies in the semiconductor
industry, and a recent deal exemplifies the challenges that his clients
face.
LogicVision Inc. hired Keck in 2008 to conduct a strategic review for the publicly traded chip design software maker. Larger rival Virage Logic Corp.
in December made an unsolicited, $10 million offer for the company but
withdrew the bid two weeks later after LogicVision rejected its
advances.
Soon after, LogicVision entered deal talks with Mentor Graphics Corp.,
one of the top three chip design software firms. But it would take more
than two months to iron out all the wrinkles in that friendly deal.
"We had the fundamentals of a combination very early after rejecting
the Virage offer, but it basically took us between December and May
before we could announce anything," Keck says. "The problems we had to
deal with to get everything ready for signing were very surprising to
us."
The hard work appears to have been worth it, though.
Mentor on May 7 announced an agreement to buy LogicVision for $13 million in stock, a 30% premium to Virage's rejected offer.
As Virage found out, adding a hostile element to the already
challenging process of reaching a deal makes success extremely elusive.
A handful of much larger hostile attempts have reached the same
conclusion over the past 12 months, including Samsung Electronics Co. Ltd.'s attempt at SanDisk Corp., chipmaker Vishay Intertechnology Inc.'s unsolicited $1.7 billion bid for International Rectifier Corp. and chip design software maker Cadence Design Systems Inc.'s $1.6 billion cash takeover attempt of rival Mentor Graphics.
Successful hostile takeovers are rare in technology, though they
have gained surprising popularity. Seven of the 10 biggest bids for
technology companies last year were unsolicited, but only one succeeded
-- Oracle's $8.35 billion purchase of BEA Systems Inc. in January 2008.
These attempted raids fail because most of an unwilling target's assets
can walk out the door.
Also, a target that is intractable in private valuation discussions
is just as likely to be so in public -- and, in most cases, so will its
shareholders -- and the odds get quite long.
Yet some wonder if now isn't the perfect time to strike hostile deals. Storage sytems provider EMC Corp. is trying to break up NetApp Inc.'s deal for Data Domain Inc. via an unsolicited bid. And then there's networking and communications chipmaker Broadcom Corp.'s $764 million run at smaller rival Emulex Corp.
While the would-be target has rejected the overtures (after having
staved off attempts at friendly negotiations with Broadcom in
December), the deal shows the lengths acquisitive companies are willing
to go to take advantage of low stock prices.
"Broadcom is one of the smartest, most forward-thinking and
aggressive semiconductor companies on the planet," says Sherry, who was
previously head of West Coast technology banking at Bear, Stearns &
Co. and Merrill Lynch & Co.'s global head of semiconductor
investment banking before that.
Broadcom has nearly $2 billion in cash to increase the bid if
necessary, he says, adding that in a generally hiring-averse
environment, "Emulex employees won't go across the street, and they'd
probably be happy to have Broadcom stock instead of their own."
The argument makes sense, especially when viewed in light of another failed unsolicited takeover offer.
Yahoo! Inc.'s unwillingness to succumb to a $48 billion overture by Microsoft Corp.
seemed foolish soon after the Redmond, Wash., software giant dropped
its $33 per share offer a year ago and doesn't seem too much smarter
now, with Yahoo!'s shares trading at around $15 each.
Can Emulex, despite its defense of offering predictions of strong
independent growth in its data center technology products, in good
conscience potentially put its shareholders through the same? It's a
risky gamble.
So far this year, Cisco has announced and closed three acquisitions,
the largest being the $590 million stock purchase of digital video
camera maker Pure Digital Technologies Inc., which closed May 21. It
did only five in 2008 before the financial markets seized up in
October, and 11 the year before.
So it's not a stretch for Carmel to say the company will top last year's number of deals in 2009.
But it took a lot to slow Cisco down from its usually fervent pace
of M&A. The company prides itself on a consistent and aggressive
approach to its investment, partnership and acquisition strategies in
rising and falling markets, Carmel says. But the chaos of late last
year sidelined even this accomplished acquirer. "At the end of the last
calendar year, it was so turbulent that it was difficult to get stable
and go into action mode in M&A," he says.
With a slightly calmer environment, there will certainly still be
hurdles for Cisco and other corporate acquirers. But the difficulties
will be slightly different now, Carmel says. "The challenge for our
organization is recognizing that just because something is for sale
doesn't mean that it is the right thing to buy," he says.
"There certainly are a lot of things for sale now."
Cisco Systems Inc. is hardly your ordinary acquirer of technology companies. With $33 billion in cash and equivalents and a track record of 133 acquisitions since it snapped up its first company in 1993, it's no stretch to say Cisco wrote the book on tech M&A But when the San Jose, Calif., networking equipment giant, which has slowed its pace of dealmaking since the financial turmoil of last year, says its about to start firing up its M&A engines again, the news will likely reverberate through the world of tech buyers.
