Technology companies may have wooed rivals with alluring, pricey buyout offers in 2008, but this year, nothing says sexy like safe deal-making.
With no signs of imminent economic recovery, tech companies are focused on producing decent earnings and trying to cope with slumping stock prices and thrifty customers.
When they assess opportunities to buy rivals, companies will be more cautious, preferring to do deals that don't use up all their cash, and where the target company has a healthy, cash-generating business that can be digested painlessly.
That means 2009 could well be the year of small- and medium-sized deals, bankers and venture capitalists said.
There could be a sprinkling of multibillion-dollar acquisitions, especially if Microsoft Corp resurrects its bid for Yahoo Inc , but supersized plays will make up a smaller percentage of the volume of technology deals this year, compared with the past five years, they said.
Bankers said they are thus gearing up for business in the "middle market" -- loosely defined as deals below $500 million.
"Large, cash-rich strategic companies are unlikely to make large, transformative acquisitions," said Jeff Bistrong, who heads the technology group at investment banking firm Harris Williams. Rather, he expects more "bite-sized" acquisitions.
"Most (companies) will keep as much dry powder and liquidity as they can because of the indeterminate duration of this downturn," Bistrong said.
A TRICKLE OF SMALL DEALS
Technology bankers said there won't be too many deals in the first few months of the year, but the pace will pick up modestly in the second half as values of target companies plunge further.
Peter Falvey, co-founder of technology-focused investment banking firm Revolution Partners, said activity could pick up at the end of the first quarter, once buyers and sellers assess how much cash they have and what their earnings look like.
Even then, most deals will range between $50 million and $250 million, he said. Acquisitions will have none of the glamour of Microsoft's $47.5 billion offer for Yahoo, or Hewlett-Packard Co's $13 billion purchase of Electronic Data Systems. Such deals -- even if buyers have the money -- often carry huge integration risks, which companies are unwilling to undertake in a market in which growth prospects are dull.
Big banks like J.P. Morgan, Morgan Stanley and Credit Suisse, which traditionally go after the meatiest deals, will be fighting "with the mid-market (banks) for sub-$200 million deals," said the head of the West Coast technology group at a large bank. The banker declined to be identified because the comment relates to the firm's strategy.
A PricewaterhouseCoopers report on the 2009 M&A Outlook predicted that in tech, there will be "aggressive acquisition activity from industry leaders ... as they take advantage of once in a decade low prices to pursue strategic portfolio fill-ins as well as cross-sector transformative deals."
There will be action in the Internet, software, computers and networking sectors, the report said. Clean technology is another area where bankers expect deal-making. Desperate to cut production costs, chipmakers may look for partners.
Start-up companies have become cheaper than a few months ago.
Fledging companies once valued at $200 million were willing to sell themselves for $20 million, and their price tags could fall even more, MySpace Chief Executive Chris DeWolfe told the Reuters Media Summit in New York last month.
MySpace, the social network owned by News Corp , would be opportunistic about deals, he said.
Bankers expect a bloodbath among start-ups this year as venture capitalists make tough decisions about which of their companies to support and which to abandon.
Venture capitalist Todd Dagres, a partner at Spark Capital which has backed super-hot micro-blogging website Twitter, said he expects his peers to use a form of "triage."
With just $2.1 billion worth of disclosed deals in the fourth quarter of 2008 according to Thomson Reuters and the National Venture Capital Association, and a dim outlook for 2009, start-ups will sell their assets at bargain-basement prices, merge to keep afloat or fold up entirely, Dagres said.
"It's going to be a bit sloppy," he said. "The weak will get consolidated into the strong and cash will be king."