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Let's make a tech deal

After a five-year hiatus, tech's biggest players are snapping up startups. Broadband and solid business models have everything to do with it.
/ Source: Business Week

Mergers are popping up across the vast landscape of the tech market. On Sept. 12, online-auction giant eBay announced that it would pay $2.6 billion in cash and stock for Internet-phone upstart Skype Technologies. The same day, software powerhouse Oracle said it would add to its heft by acquiring business-software maker Siebel for $5.85 billion.

Those were just the latest in a flurry of deals in recent quarters. Networking giant Cisco remains a steady M&A machine, picking up small tech outfits such as KiSS Technology, which connects online entertainment devices. Oracle had already grabbed headlines with its hostile-takeover of software company PeopleSoft and a succession of smaller transactions.

Internet companies, which lost much of their cache and credibility after the market's crash of 2000, are sought after once again. News Corp. has taken out gaming site, as well as Intermix, the parent of social-networking site Yahoo! bought Internet photo upstarts Flickr and Pixoria. Google acquired photo service Picasa and mobile service EBay has already pickedup

There's a host of financial and technological currents behind the resurgence in tech deals. A few years ago, just about everything seemed be going wrong at once for tech outfits. Business dried up thanks to a combination of financial instability, a weak economy, a murky regulatory outlook, and a slew of wireless and broadband innovations that weren't quite ready for the market.

As a result, the number of tech deals plummeted to 36 in 2002, from 358 in 2000, according to researcher Thomson Financial.

Cash to splash
The outlook is cheerier for tech companies now. Buyers have cleaned up balance sheets and would-be targets are generating revenue. The economy is stronger, and technologies such as wireless e-mail, wireless fidelity, digital music, high-definition TV and broadband work better and cost less. As a result, the number of tech transactions rose to 60 last year from 50 in 2003, and is on track to best that number by 10% or more in 2005, according to Thomson.

Finances are much more conducive to business and deal-making. At the end of the second quarter, the 80 tech players in the Standard & Poor's 500-stock index some $229 billion in cash and equivalents on their balance sheets -- more than twice the total at the end of 1999, according to Standard & Poor's.

Many of those companies have been using that cash for M&A. And target Internet companies are healthier and therefore more attractive. The Interactive Advertising Bureau said in June that Internet advertising totaled more than $2.8 billion in the first quarter of 2005, up 26% over the prior year.

Broadband's impact
"During the bubble years, there were a lot of companies that had no right to be in business," says Jack Flanagan, senior vice-president at market researcher comScore Networks. "The Internet companies that are around today have weathered the storm. They have strong business models and they are executing well."

The rise of faster, always-on broadband connections has been a particular boon to the tech M&A market. Many new Internet services — such as those delivered by Skype — are designed with broadband users in mind. Skype lets members make free phone calls via computers loaded with the outfit's free software. It's one of many new technologies that just don't fit with outmoded dial-up connections.

And software companies like Oracle are expanding their offerings and preparing for the day when pieces of software will interact automatically in new ways over faster networks. "The Internet is beginning a new chapter," says Danny Rimer, a general partner at Index Ventures, an early investor in Skype. "Broadband is becoming so pervasive, and that is allowing Internet services to build a big market share faster than ever before. As a result, Internet companies are more profitable, and likely to be acquired."

Big fish, little fish
Rimer says he expects the acquisition of Internet outfits and the tech-infrastructure companies that enable them to operate to continue. Internet companies will be in demand, he says, "because innovation is moving at such as fast pace, and big companies realize they can't develop all of the innovations they need in-house."

So where will the next deals occur?

The software industry will remain active. Big corporations increasingly want to purchase their software from a few big players. That's forcing the smaller outfits into the arms of larger buyers. is viewed as a likely takeover target, according to analyst Stuart Williams of Technology Business Research. Potential buyers could include big software companies, possibly even Oracle itself.

Consumer services will remain an important area of growth. As broadband becomes ubiquitous in the consumer sector, the potential for revenue growth is enormous. Rimer is betting on companies that "disrupt" old business models, such as BetFair, which he describes as an eBay for the betting world. Rimer declined to say how much Index made from its investment in Skype.

Traffic magnets
News and information giant Reuters is viewed as a possible target for Google, which wants to beef up its news services so it can compete with Yahoo. If the idea of an Internet service owning a traditional news service seems strange, think again. Yahoo just hired its first reporter to cover global warfare. And media sites such as and CNET have significant amounts of traffic attractive to a broad range of traditional media companies and Internet companies alike. Wedding site has been in talks with Target, too.

The pressures leading to more M&A activity are global as well. China is the world's fastest growing Internet market, and may eventually overtake the U.S. to become the largest. Chinese sites such as IM giant are drawing the attention of investors and investment bankers from around the world.

For investors, the main question is whether today's deals will fare any better than those of a half-decade ago. The transactions now may seem smaller and more conservative, vs. the extravaganzas of the late '90s, when Time Warner bought AOL and AT&T bought its way into the cable-TV business. Those megabuck deals didn't work out.

A boom with legs?
Still, and once again, valuations could again become an issue. eBay is paying $2.6 billion for Skype, which had just $7 million in revenue during its first two quarters as a revenue-generating business last year. While the company expects to generate $60 million this year, there's no guarantee that will happen.

The boom is likely to go on for some time. Buyers have lots of cash, and sellers look much more stable than those of years past. Technology is challenging old giants and creating new opportunities — and the appetite for big bets is rising once again.