IT mergers and acquisitions will continue despite economy

Despite the uncertain economy, mergers and acquisitions (M&A) in the technology space will continue in 2009, albeit in a non-traditional form involving certain technologies that are driven by customer needs to cut costs.

Ira Cohen, managing partner of New York-based investment bank Updata Advisors Inc., said that while the past couple of years have shown a demand for technologies like data centre automation, risk management and cloud computing, those areas will really drive M&A activity this year.

Updata Advisors, which specializes in M&A, released its annual outlook report on IT transactions for 2009.

Besides the cost-cutting benefits, said Cohen, such technologies provide other advantages for mid-sized and large organizations. “Computing in the clouds provide some efficiencies as it relates to all of the users being on the same version, the same apps,” he said. “It’s just a more efficient way to provide the users with computing services.”

According to Vito Mabrucco, senior vice-president and managing director with Toronto-based research firm IDC Canada Ltd., the networking and software space will also experience significant M&A activity this year. Global companies wanting to remain competitive in this space must “get bigger or get bought,” he said.

The difference with this recession and that of 2001, said Mabrucco, is today’s competitive landscape is more global, with the addition of players like large well-funded companies from India and China that have a strong customer base and expansion in mind.

Also, in the report, Updata Advisors expects that non-traditional M&A transactions will play an important role this year, meaning there will be more activities like divestitures, mergers of equals, and joint ventures. In the case of divestitures, Cohen said such transactions will be driven by companies looking to shed non-core assets. “We are talking to a number of public companies thinking about shedding units that for the long term are not fit or are not performing, or in some cases are performing but they don’t sit with the long term strategy of the company,” he said.

The bulk of M&A activity this year will be “non-mega transactions”, which although significant, will be in the sub-US$200 million range, said Cohen, adding this is due to a “general caution in the wind. I think larger transactions bring lots of risk.”

While transactions of that size will continue, Mabrucco thinks in the next 12-18 months, there could be room for a “major merger” as companies take serious stock of their business and the available opportunities that complement that.

But while buyers will be cautious, Cohen acknowledged there are those who will take advantage of the economic environment and acquire businesses to make themselves competitive.

Updata Advisors has identified a number of companies – including Cisco Systems Inc., Microsoft Corp., Google Inc., EMC Corp., Hewlett-Packard Co., IBM Corp. – in the market for specific technologies and “sitting on over $100 billion of cash,” said Cohen, noting that last year those companies announced more than 60 transactions.

And while risk-averse buyers and sellers will perform more thorough due diligence this year, thereby lengthening the transaction process, those companies with available cash will continue to seek opportunities, said Cohen. “A lot of those companies continue to generate cash, it’s not like they’re losing money,” he said. “They’re making money now, and they have to do what’s in the best interest of the shareholders.”

Mabrucco agreed that while the IT industry is currently suffering, the combination of “positive cash flow” and depressed prices will make it easier for companies to “pick up the right complementary assets.”

As with the recession in 2001, it’s a “flight towards bulking up and getting bigger while you have the chance,” said Mabrucco, noting that the business cycle will inevitably circle back, benefitting those in the right place with the right assets

Cohen said Updata Advisors has already closed three M&A deals this year, each falling in the sub-$200 million range. One involving a security firm, one an IT services firm, and another is a combination of two publicly-traded companies.

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