Analysis: Software M&A heats up as firms battle budget squeeze | Reuters

By Paul Sandle and Tricia Wright

LONDON | Fri Dec 17, 2010 1:17pm EST

LONDON

(Reuters) - Big-name technology firms will compete to acquire niche software groups in 2011 as part of a growth plan they hope will cater to recession-hit clients clamoring for a wider range of services.

Having learned the lessons of the dot-com bubble collapse in 2000, technology companies were quick to cut headcount -- their biggest cost -- at the start of the downturn.

And with revenues returning to growth, they have pockets full of cash at their disposal.

Major companies, such as IBM (IBM.N) and Oracle (ORCL.O), are buying specialist software makers so they can offer more to corporate customers who need to cut IT budgets, thereby holding on to high margin, long-term maintenance contracts.

"Companies ...need to offer a portfolio of products," Panmure Gordon analyst George O'Connor said. "They will ask 'what additional services can I sell to my customers, thereby increasing my wallet share'."

Ernst & Young estimated the top 10 global technology companies had about $290 billion cash on their balance sheets at the end of June -- a number that partner Karl Havers said was "amazing, and a sign of things to come."

Oracle alone has spent more than $42 billion on acquisitions over the past six years, and it had $10.4 billion in cash at the end of November.

"Many of these new things will be most profitably done on a very large scale, and the smaller companies who are generating these great new ideas may not have the capital to do that," said Havers.

"The tech sector has been good through this downturn in conserving cash and managing costs," Conor Cahill, Deloitte's technology corporate finance partner said.

"With revenues recovering, the companies need to find a use for this money, and they are looking to place bets on emerging technologies."

EUROPE IN THE SPOTLIGHT

European deals are recovering but have a long way to go to catch up with pre-recession levels. That said, though it may be early days in the M&A recovery, premiums are rising fast as the field becomes more crowded.

The total value of deals in European technology by mid-December 2010 was $19.9 billion, up 7.5 percent on 2009, but still only 36 percent of the $54.7 billion of deals in 2007 before a global downturn, according to Thomson Reuters data.

Global acquirers stumped up nearly three times revenue and just under 20 times adjusted core earnings in the second half, both at the highest level for two years, according to Deloitte's UK Technology M&A survey.

The biggest premiums so far have been in U.S. deals, such as IBM buying Unica to offer more marketing software to corporate clients, and Hewlett-Packard beating Dell to buy data storage company 3PAR.