Wall Street Beat: M&A, VC funding stay hot

IT mergers and acquisitions and venture capital funding continue to shore up investor confidence in technology.

Merger and acquisition news from companies as diverse as Yahoo, Cognos, and MetroPCS Communications heated up IT investor interest this week, shoring up confidence in the sector even as credit-market concerns continued to buffet the stock exchanges.

After wireless carrier MetroPCS proposed a merger valued at about US$5.5 billion with rival Leap Wireless, its share price Tuesday spiked $1.36 to close at $28.65. Brokerage Jefferies & Co. Wednesday then upgraded its rating on the stock from "hold" to "buy," sparking another uptick in the company's share price. Though the merged company would have about 6.2 million customers, a far cry from the 50 million-plus subscriber base that market leaders like AT&T and Verizon have, the combined company would be the fifth largest in the U.S., with a national footprint.

Meanwhile, investor faith in the beneficial effects of mergers was underscored by share-price increases in all the major acquiring companies this week. Often, the acquiring company stock takes a hit because acquisition costs are usually expected to dilute earnings for a while.

Business performance software vendor Cognos Wednesday said it agreed to pay $339 million for Applix, a developer of performance analysis software. The company has an aggressive plan to integrate Applix's products by early next year. Company shares jumped by $0.18 to close at $41.08 Wednesday, rising further on Thursday as brokerage JPMorgan raised its rating on the shares, saying that underlying demand for the Cognos' software and services is strong. JPMorgan also said that gross margins on product sales at Cognos should also benefit from the Applix acquisition.

Yahoo meanwhile continues to pursue its strategy of scooping up companies in the online advertising market, Wednesday announcing a $300 million purchase of BlueLithium. BlueLithium's banner advertising network should help expand Yahoo's ad reach. The news sparked shares to rise by $0.13 to close at $24.10.

Also this week, IP-based communications technology company Telanetix announced it would buy VOIP company AccessLine Communications for up to $34.9 million in cash and stock, and Oracle continued its buying spree. Oracle snapped up Netsure Telecom, a provider of network intelligence and network data integrity software, and Bridgestream, a maker of software that helps companies map employee responsibilities, for undisclosed amounts.

The M&A news mirrors data on venture capital funding, which in the first half of the year hit its highest point since 2001, with IT taking a big share. Now, the latest MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on Thomson Financial data, shows that a growing percentage of those funds are coming not from pure venture-capital firms, but from operating companies such as manufacturers and IT vendors. A lion's share of this corporate VC funding is also going to IT businesses.

For example, corporate VC funding amounted to $1.3 billion in 390 deals in the first half of 2007, representing 21.4 percent of all VC deals - the highest percentage of corporate venture deals and dollars since 2001, according to the report. The biggest slice of the investment pie - 20 percent - was taken by software companies. Intel was the biggest corporate investor, plunking down $112.3 million in 42 deals.

"Corporate venture capital deals are a good measure of confidence in IT," said Claudia Fan Munce, the Chairman of NVCA's Corporate Venture Board and managing director of IBM's Venture Capital Group. While pure venture capital companies need to make investments just to stay in business, operating companies like IT vendors don't have that particular sort of pressure, she noted. Corporate VC funding and M&A "allow companies to tap into innovative new technologies and business models," she said.

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Marc Ferranti

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