Tech sector sees more deals despite tough financing

By Ritsuko Ando - Analysis

NEW YORK (Reuters) - The global technology industry is expected to consolidate further as companies seek niche technologies and greater economies of scale, even as troubled credit markets make it tougher to raise money for deals.

Most executives attending the Reuters Global Technology, Media and Telecoms Summit this week said they expect more mergers and acquisitions in their sectors, whether that be software, computer services or network operators.

"I do think valuations are attractive now, and I think we have advantages in this framework 'cause we have a very healthy balance sheet, strong cash generation, good cash on hand," said IBM (IBM.N: Quote, Profile, Research, Stock Buzz) Chief Financial Officer Mark Loughridge.

"It used to be, 10 years ago, when we made the Lotus acquisition, it was kind of an opportunistic approach doing M&A. Now, it is very much an operational aspect of our business."

Even with the pullback in private equity-led leveraged buyouts, the tech industry has seen no shortage of dealmaking this year, including Hewlett-Packard Co's (HPQ.N: Quote, Profile, Research, Stock Buzz) agreement to buy Electronic Data Systems Corp EDS.N for an equity value of $13.2 billion.

And the biggest deal in Silicon Valley this year may be yet to come, with Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) and Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) still giving each other backward glances.

Data from Dealogic shows technology companies globally have announced 1,991 M&A deals in the year to date, a 16 percent increase from the same period last year. But smaller deals mean the total value fell to $94 billion from $105 billion.

SWEET SPOT

Reflecting the "small is beautiful" trend, executives from software makers such as Adobe Systems Inc (ADBE.O: Quote, Profile, Research, Stock Buzz) and McAfee Inc (MFE.N: Quote, Profile, Research, Stock Buzz) expressed more interest in acquiring specialized technologies than in big, transformative mergers.

"Expect to see us do more of these small acquisitions," said Adobe CEO Shantanu Narayen, referring to companies with 10 to 50 employees that could fill technology gaps. "That really is more the sweet spot of where we're looking."

McAfee CEO Dave DeWalt said he was eyeing acquisitions worth around $50 million to $350 million.

Information storage company EMC Corp (EMC.N: Quote, Profile, Research, Stock Buzz) has bought more than 40 companies for a total of about $8 billion since 2003. Chief Financial Officer David Goulden said the company would keep shopping.

"There aren't many who have been as acquisitive on a routine basis. And we continue to focus generally on small- to mid-size acquisitions as tuck-ins or line extensions and continue to do that this year," he said.

Goulden said the company would look at firms specializing in areas like security and Web-oriented cloud computing --a technology that enables Internet companies to deliver Web-based applications to far-flung users.

In the telecoms business, wireless service provider Virgin Mobile USA Inc (VM.N: Quote, Profile, Research, Stock Buzz) expected more consolidation, particularly among smaller players.  Continued...