Friday, September 11, 2009

BusinessWeek: Investing in Technology M&A

Posted on September 10

By Aaron Pressman

The conventional wisdom used to be that investors should run from technology companies that did too many mergers and acquisitions. But over the past decade, a group of top-tier tech wheelers and dealers has emerged that increased shareholder value with their acquisitiveness. Companies such as Oracle, IBM, and Adobe Systems have successfully used acquisitions to get into new lines of business, 0910_hands.jpg expand their customer bases, and grab hot new technologies. Still, some companies consistently overpay or buy yesterday's big breakthrough. An informal survey of tech fund managers, analysts, and consultants yielded a list of companies investors will likely favor on more deal news—and a few they may shun.

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Once mainly a hardware vendor of computers large and small, IBM (IBM) has used a sharp acquisition strategy to expand into software and information technology services. After a string of successful additions, including performance management software maker Cognos, and Rational, which makes tools to help programmers write code, IBM announced in July it would pay $1.2 billion for SPSS, a leading developer of software to analyze statistical data. "All the software acquisitions have helped shift the company toward higher margins and faster growing areas," says Ken Allen, manager of the T. Rowe Price Science & Technology Fund. IBM was his 15th largest holding as of June 30. (CRM) has always been a poster child for the move from desktop applications to Web-based products. As more computing and data storage have migrated to online servers—the clouds in "cloud computing"—Salesforce has used a series of small acquisitions to keep pace. In 2006 it grabbed wireless software developer Sendia, for example, helping make all its offerings available over mobile phones. "They're doing a good job of pushing each acquisition into their services," says Jeff Kaplan, founder of tech consulting firm Thinkstrategies.

Cisco Systems (CSCO) is the king of bolt-on acquisitions. In a typical deal, Cisco purchases a much smaller company, such as voice-over-Internet gearmaker Sipura, which it bought for $68 million in 2005. Then it uses its manufacturing smarts and sales force to promote cutting-edge products that often fit into existing lines of business. Cisco also uses purchases to diversify and get into new businesses. This year it added Pure Digital Technologies, maker of the Flip digital video camera. "Their goal is to become a larger player in the consumer electronics and networking business," says Ned Douthat, an analyst at Ockham Research in Roswell, Ga.

One company that Richard Parower, manager of the Seligman Global Technology Fund, says never quite makes the right deal at the right price is Microsoft (MSFT)—"the one glaring example of [tech companies] that can't do acquisitions." For example, Microsoft paid more than $6 billion for Web advertising company aQuantive, a price several investors say was far too high. And its on-again, off-again talks to buy Yahoo! have shareholders worried about another surprise deal. T. Rowe's Allen thinks "investors are still discounting the probability they'll do something so risky again." A Microsoft spokesman says: "We buy where it makes sense, where we can accelerate growth, and generally we buy companies early in their history."

Another loser, say investors, is mobile-phone manufacturer Motorola (MOT). "Remember Symbol Technologies and Good Technology, both acquired by Motorola?" says Eric Jackson, founder of Naples (Fla.) money manager Ironfire Capital. "They have disappeared off the face of the tech landscape." Motorola says it's pleased with both deals and notes that Good's programmers are central to building products that use Google's Android mobile-phone software.

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