Wall Street Beat: Rise in markets could fuel tech M&A

Confidence in the economy will help companies value bigger deals

Increasing confidence in the economy and a rising stock market could lay the groundwork for a revival in tech-sector mergers and acquisitions as companies embrace cloud technology and pursue game-changing software, particularly for the mobile market.

On Friday, the Dow Jones Industrial Average, the Standard and Poor's 500 and the tech-heavy Nasdaq exchange all closed up for the week, marking three straight weeks of gains. Last week the Dow and the S&P broke through to milestone levels -- 15,000 points for the Dow and 1,600 for the S&P.

Meanwhile the Nasdaq closed up 27.41 at 3463.58 Friday, its highest point since 2000, right after the dot-com boom started to go bust.

"Ultimately higher market values should result in higher valuations for sellers and thus result in more deals," said Rob Fisher, PricewaterhouseCooper's U.S. technology industry deals leader, in an email. "To the extent the rising markets are driven by confidence in long term fundamentals that also tends to increase the appetite of buyers who tend to shy away from deals when they have uncertainty about their existing prospects."

After declines in deal volume and value in 2012, the tech M&A scene in the first quarter of 2013 was "dismal," according to a recent report by PricewaterhouseCoopers.

The number of deals closed decreased 38 percent to 40 in the first quarter compared with 65 deals closed in the last quarter of 2012, PwC said. First quarter deal value plunged 60 percent compared to the fourth quarter, to US$8.3 billion. Compared with the first quarter of 2012, deal volume and value decreased 38 percent and 72 percent, respectively.

But things are looking up. Just this week, a number of announced and rumored deals involving big-name tech companies like Intel, BMC, Microsoft and Facebook highlighted what could be a spring awakening for tech M&A.

In the biggest deal of the week,BMC said Monday it has agreed to be acquired by a private investment consortium headed by Bain Capital and Golden Capital, for about $6.9 billion. The move will allow BMC to further develop its IT systems management business to embrace cloud computing without the intense, quarter-to-quarter earnings scrutiny faced by public companies.

The Dell $24.4 billion privatization deal, first announced in February, made headlines again Friday. Investor Carl Icahn and Southeastern Asset Management sent a letter to company management countering Michael Dell's plan to go private with an offer that would give shareholders a large payout and still keep the computer company publicly traded.

The original deal calls for Michael Dell and Silver Lake Partners to buy the company with, in part, a $2 billion loan from Microsoft and debt financing. Dell is betting that operating outside the scrutiny of Wall Street, it will be better able to execute its strategy to push into high-margin products and services.

Meanwhile, Dell announced it has purchased Enstratius, which develops software to let customers manage cloud resources across multiple providers, for an undisclosed sum.

On Monday, Intel subsidiary McAfee announced plans to acquire Stonesoft, a Helsinki-based maker of firewalls, for $389 million in cash. McAfee noted that firewalls are a quickly growing segment of the network security industry and an area it plans to focus on.

In addition,Intel on Thursday announced two smaller acquisitions as it extends its product lines to software development and management tools. Intel said it is acquiring Belfast-based Aepona and San Francisco-based Mashery, which collectively offer software to help businesses manage APIs (application programming interfaces) and monetize services based on customer location and device type.

There are also some big rumored M&A moves in the works. A year after investing $300 million in Barnes & Noble's plan to spin off its Nook business, Microsoft is reportedly thinking of offering $1 billion for Nook Media, according to TechCrunch and other published reports. Although sources cited by The New York Times stressed the deal is not certain, such a move would fit into Microsoft's plan to offer a portfolio of digital services.

Another billion-dollar deal reportedly in the making is a Facebook offer to acquire the Israeli-based Waze crowd-sourced mapping and traffic app. Facebook is considering the move to enhance its efforts in mobile, according to Israeli business site Calcalist.

This week's M&A news may be a portent of things to come.

"Positive signs in the U.S. economy, coupled with a reduction in uncertainty are laying the foundation for more robust deal activity as the year progresses," according to PwC.

A better job market is helping boost confidence in the economy. On Thursday, the U.S. Department of Labor reported that the number of people applying for unemployment benefits declined by 4,000 last week to a seasonally adjusted, five-year low of 323,000.

Though there were signs in the first quarter that the economy was improving, a pall of uncertainty hung over markets, PwC noted. The government's so-called sequestration of funds, arising out of a budget-slashing political compromise, resuscitated fears of another U.S. recession. Concerns about the ongoing recession in some European countries were compounded by the failure of bank in Cyprus, a tax haven for investors from third-party countries.

Concerns subsided somewhat as the European Central Bank worked out a compromise deal on Cyprus that hit mainly the richest investors, and for tech companies, "Sequestration, rather than a "catastrophe," may ultimately turn in their favor as technology businesses provide government organizations innovative tools to reduce costs and drive efficiencies," PwC said.

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Marc Ferranti

IDG News Service
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