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Executives at eBay (EBAY, news, msgs) know a bargain when they see one. For Lorraine McDonough, eBay's mergers chief, 2008 is shaping up to be a good year to go shopping.
Banks are reining in credit, relegating competing private-equity firms to the sidelines, and stocks are tumbling, taking a bite out of asset prices. "We are in a good position to make acquisitions," McDonough says.
The e-commerce company kicked off the year with the purchase of payment-security firm Fraud Sciences for $169 million and expects to make eight or nine acquisitions this year, roughly twice the usual target tally, McDonough says.
Tech buying fever is catching. At the end of January, Microsoft (MSFT, news, msgs), the publisher of MSN Money, made an unwelcome $44.6 billion bid for troubled Web media portal Yahoo (YHOO, news, msgs). Oracle (ORCL, news, msgs) is spending $8.5 billion to buy rival BEA Systems (BEAS, news, msgs). In mid-March, Time Warner's (TWX, news, msgs) AOL unveiled the biggest-ever acquisition of a social network, agreeing to spend $850 million on Bebo.
Flush with billions of dollars in cash and with virtually no debt, tech bellwethers are stepping up the deal making as a slowing economy and market malaise cut valuations.
In dollar terms, high-tech mergers and acquisitions have surged 132% this year, through March 25, from the same period a year earlier, according to Thomson Financial. Tech companies "are absolutely bargain hunting," says Benjamin Howe, the CEO of investment bank America's Growth Capital.
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Tech firms aren't alone. Deals are up in finance and the steel industry, too, although more modestly. JPMorgan Chase's (JPM, news, msgs) Federal Reserve-subsidized offer for Bear Stearns (BSC, news, msgs) reflects the consolidation of an industry beleaguered by subprime lending gone awry. Steel makers are combining amid rising prices for commodities.Still, for most industries, these are dreary days for deals. The value of mergers and acquisitions, or M&A deals, has tumbled 51% this year, with the sharpest drops in telecom, consumer staples and real estate.
And though deal prices in tech and some other industries may look attractive now, they could fall further if the economy continues its slide. Recent reminders of the dangers of overestimating potential revenue benefits and cost savings of a deal include Sprint's (S, news, msgs) $30 billion loss to reflect the write-down of almost the full purchase price of Nextel, acquired in 2004. EBay recorded a $1.4 billion charge on Skype, the Internet calling outfit it bought in 2005.
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Finding bargains in techTechnology stocks are often viewed as the playground for growth investors. Charles Mizrahi, the editor of the Hidden Values Alert newsletter, and Rick Hanna, a Morningstar analyst, discuss attractive choices.
Tapping tons of cash
Yet tech firms consider deals alluring not just because prices are low, but also because targets' buyout alternatives are dwindling. Venture capitalists are placing higher demands on strapped startups that are reluctant to enter a murky IPO market for fear of not getting top dollar."With venture firms and management teams less optimistic on their prospects and more realistic on valuation, there will continue to be very heavy activity for major acquirers," Howe says. Some of last year's most promising initial public offerings among tech companies, including VMware (VMW, news, msgs) and NetSuite (N, news, msgs), are well off their highs.
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