Year-long tech wreckage chills urge to merge

By : |March 7, 2001 0

Ian Simpson

NEW YORK: The year-long slide in US technology shares has chilled the
sector’s once red-hot merger market, and deals now are focused on companies
eager for a footing in an uncertain economy.

A slowing US economy has big, high-technology companies more cautious in
taking over other corporations – public or private – analysts said.
"Companies are not willing to make big bets when their confidence is
shaky," said Merger Insight, an institutional research service president
Tom Burnett.

                                 

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The drop in mergers in industries such as personal computers, software,
Internet equipment makers and fiber optics parallels the fall in the tech-laden
Nasdaq Composite Index .

As of midday on Tuesday, the market gauge was down 56 per cent since its
record high a year ago this Saturday. The 162 announced US mergers and
acquisitions last month through Feb. 27 totaled $4.8 billion, according to
Thomson Financial Securities Data Corp. in Newark, N.J.

In March 2000, at the height of the technology bull market, 479 mergers and
acquisitions totaling a record $97 billion were announced. The February dollar
figure is the lowest since May 1997. The mergers market is "shrinking,
shrinking, shrinking," said a Thomson Financial analyst, Richard Peterson.

Even Cisco is not buying
Even the most shop-’til-you-drop corporations have taken a breather. For
example, Cisco Systems Inc., the world’s biggest maker of gear that directs
traffic on the Internet, announced 22 mergers last year worth $12 billion.
Almost half of that total went to buy switchmaker ArrowPoint Communications in
May.

So far this year – nothing. Nonetheless, a Cisco spokeswoman said the
company’s overall strategy, including growing through acquisitions, remained
intact. Part of the slowdown comes from the collapse in stock prices. Since many
companies used their shares as currency in acquisitions, a price drop means they
have to pony up more stock to buy companies.

"Cash is king in this market," said Kevin McClelland, principal at
Broadview International, a high-tech advisory firm that specializes in mergers
and acquisitions and private equity. "Companies that … have an ample cash
balance are more aggressive in using cash."One of the biggest deals
announced in recent weeks was for cash.

German engineering and electronics group Siemens AG said last month it would
pay $1.5 billion in cash to buy Efficient Networks Inc., a Dallas-based
broadband equipment maker.

Some investment bankers remained optimistic activity may pick up later this
year. Technology will be the most active industry if there is a rebound this
year, said Robert Thornton, Deutsche Banc Alex. Brown’s head of West Coast
technology mergers and acquisitions.

"Assuming there is a bounce either mid-year or late year, I think that
technology will be one of the leaders in terms of deal volume relative to other
industries," Thornton said.

"One thing that has clearly changed is that people have gotten over the
fact that companies that were worth twice as much six months ago or three months
ago than they are worth now. People have a sense of what reality is today."

Thornton said software was one sector he was seeing a revival in merger
activity, especially software that supports data storage and retrieval over
networks.

McClelland said the tech downturn has made potential buyers favor strategic
mergers that boost earnings immediately.

"The last thing they want to do is tell the Street that this (deal) is
going to push out profitability two quarters," said McClelland, who is
based in Foster City, Calif.

Much of recent merger activity has focused on publicly traded high-tech
companies with plummeting stock prices, and start-ups that are faced with
running out of money.

With credit markets drying up and investment banks holding off many initial
public offerings until the equity markets revive, one way out for a
cash-strapped company is a takeover.

(C) Reuters Limited 2001.

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