Tech M&A Swinging into High Gear

The sight of survivors circling the weak and dying is one of the surest signs of economic recovery and the tech sector is showing signs of just such a feeding-frenzy-in-the-works as its rate of mergers and acquisitions continues to increase.

“Most tech segments have not seen this level of activity since the pre-tech bubble days,” said Steven Brady, national partner in charge at Grant Thornton LLP, Tax Advisory Services.

The reasons for buying and melding software and/or info-tech companies boil down to just three: to eradicate competition, consolidate customer bases, and add technology or talent. These three needs always exist. It’s only the timing that is affected by circumstance.

“This trend is attributable to the economic recovery, the large cash stockpile companies have accumulated during the recession, stock market gains, improved credit availability, shortage of IT talent including software engineers, and the desire of some hardware firms to be ‘one-stop shops,'” explained Robert Scott, managing partner of Intellectual Property and Technology the law firm Scott & Scott.

Beyond the initial relief that such a sure sign of recovery exists, what does all this buying and merging mean for the rest of the players on the IT landscape?

“IT executives would do well to determine which side of that [buy/sell] line their current vendors and providers are on, and make contingency plans in the event theirs are acquired by a competitor and their products and services slated to be sunset in favor of the acquirers,” advised Norman Harber, CEO of Leverage Corporation, a firm that specializes in strategic IT sourcing.

That’s advice that IT pros would do well in heeding. BDO, the fifth largest accounting and consulting firm worldwide, recently released findings from its The 2011 BDO Technology Outlook Survey in which 78 out of 100 tech firm CFOs reported they expect to see an increase in M&A deals in 2011; and 32% forecast that the traditional software sector will experience the majority of this activity.

Who’s buying what

Scott says that another driver fueling consolidation comes from advances in the tech industry including demands from mobile and cloud computing, data storage needs for increased video and electronic recordkeeping, and information security. IT vendors augmenting their product offerings with mergers and acquisitions include Intel’s purchase of security firm McAfee; HP’s purchase of 3Par data storage for public and private cloud computing; and HP’s acquisition of ArcSight to enhance their software and security portfolio. But there is notable action in where sectors collide and overlap.

“Because many of the latest technology advancements are now touching the healthcare industry, we are seeing two of the hottest sectors beginning to converge, making them a potent combination for M&A activity,” said Brady. “As the market demands more technology solutions, the tech sector will continue to lead the first of what will likely be several M&A waves for other sectors to follow.”

Indeed, that pattern is emerging in a number of sectors already. Take for example, HR: the growth of its technology needs and the advent of the cloud.

“Recent mergers in our arena, HR technology, seem to indicate a need for vendors to address the market’s request for ‘full solutions’,” explained Nov Omana, chairman of IHRIM, the world’s leading clearinghouse for the human resource information management (HRIM) industry. “Vendors see an opportunity to ‘gobble’ capabilities from smaller vendors or newer “slick” technologies and put them behind a SaaS or cloud portal.”

For some of the larger companies, or those firmly rooted in a silo, innovation is also more quickly and easily achieved via mergers and acquisitions.

“At a macro level, one could argue that what is driving much of today’s M&A activity is the recognition that the next wave of innovation, process optimization and knowledge worker productivity will be achieved by combining existing technologies from adjacent markets,” said Hyland Software’s manager of Competitive and Market Intelligence, Ken Burns.

Mergers and acquisitions are also a means to reduce other development costs.

“Some of the big players likely will view the current M&A market as an opportunity to acquire emerging or progressive technologies at a discount and reduce their own potential R&D costs,” said Harber.

“Needless to say, don’t be surprised if the M&A activity taking place over the next 24 months produces some unlikely bedfellows,” Burns added.

Plum pickin’s

As any accountant or broker can tell you, software and info-tech companies have comparatively few tangible assets so their value is often based on a multiple of revenues or EBITDA (earnings before interest, taxes, depreciation and amortization). A recession can knock that valuation way down in just a few years and it can dry cash flow to a trickle. “If the company being acquired is in distress and the owners starved for cash, it can be an even bigger bargain,” explained Harber.

While a vendor or provider in financial distress represents a risk to its customers, “it also presents an opportunity where a customer is in a position to acquire the assets and talent of a key provider or vendor for themselves and bring the solution or service in house.”

Indeed, talent is often the biggest asset a struggling or smaller software or info-tech firm has.

“Many large companies are making talent acquisition hires (especially for engineers), while small companies are attracted to the instant reach and distribution muscle of being part of a larger entity,” said Nathan Beckord, CFA, a startup coach, interim CFO and consultant at VentureArchetypes. “Mix all these ingredients together, add in a more optimistic economic outlook, and I think we’ll see a red-hot software M&A environment this year.”

This is not to say that a new dot com boom/bust cycle is underway. No, this is your garden variety if-you-can’t-grow-market-share-buy-it strategy at work.

“Eventually the consolidations will run their course and the big players will have sated their appetite to acquire a piece of ‘the next big thing,’ and activity in this sector will return to normal, or whatever passes for ‘normal’ in the post-downturn economy,” said Harber.

Meanwhile, it is entirely possible that IT executives can fulfill their wish lists by influencing vendor acquisitions.

“IT executives who wish their top tier provider could supply or provide A, B and C might find an opportunity to steer those providers towards potential acquisition targets and make themselves beta sites for the consolidate product for a discount on their license and maintenance fees,” said Harber.

Thus the post-recession feeding frenzy can be a feast for all.

Bon Appétit.

A prolific and versatile writer, Pam Baker’s published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine,, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making. She is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).