Cash in Hand, High-Tech Giants Snap Up Rivals
Wednesday, July 29, 2009
As an avalanche of bankruptcies shutters retail chains, construction firms and restaurants across the nation, high-tech industry heavyweights are seeing opportunity in the stubborn economic downturn. IBM, Intel and Oracle have been on a buying binge in recent weeks and are among the few companies with the resources to make major acquisitions as banks clamp down on borrowing.
In a repeat of the dot-com bust of the early 2000s, the tech giants are snapping up competitors at relatively low prices to bulk up and buy into new lines of business so they are better positioned when the economy rebounds.
"A lot of us believe tech will lead the market out, so investing in tech makes sense," Silicon Valley investor and consultant Rob Enderle said. "You've got a lot of properties that are undervalued. So if you've resources and cash, now is time to make purchases."
On Tuesday, IBM announced the $1.2 billion purchase of SPSS, a Chicago statistical software company whose products would be used by IBM to address customers' desire to cut costs. Struggling wireless carrier Sprint Nextel also announced that it would buy Virgin Mobile USA, its competitor in the fast-growing prepaid cellphone service market, in a deal valued at about $483 million. Sweden's Ericsson said Monday that it would buy Nortel Networks' wireless voice business for $1.13 billion. Last week, online bookseller Amazon stepped into shoe sales with its $847 million takeover of online footwear retailer Zappos.com.
Acquisitions are more active in the tech sector because stocks haven't been hit as hard as other sectors, said Claire Gruppo, managing director of Gruppo, Levey & Co., a New York-based investment bank that specializes in mergers and acquisitions. And few firms have the cash on hand that Intel, Cisco, Microsoft and Google do to strike such deals, she said.
"This is a good market for companies to consider merging with competitors because customers are fewer and there are fewer consumer dollars being spent," she said.
The relative resilience of the high-tech sector shows its growing importance in the economy, analysts such as Enderle said. He said companies will soon begin reinvesting in high-tech equipment and services to fuel expansion. And people are buying cellphones and laptops instead of new washing machines and vacation airline tickets. Last week, for example, Apple reported that it sold 5.3 million new iPhones in the most recent quarter.
That sentiment has been reflected in the market, with the tech-heavy Nasdaq outperforming the other major stock indexes this year. The Nasdaq has increased 25.3 percent since Jan. 1. That compares with a 3.6 percent increase for the Dow Jones industrial average and an 8.5 percent rise in the Standard & Poor's 500-stock index.
The Obama administration's push for broadband pipes to every home has also stoked enthusiasm for tech stocks. Investors think telecommunications firms will get more business as the $7.4 billion in stimulus funds are allocated for broadband deployment. And as more high-speed Internet pipes and broadband wireless networks are created, analysts expect more demand for network switches, smartphones, online video and other services that will prop up the industry.
"These are the next generation of companies that are going to be bellwethers for the economy," Yankee Group senior analyst David Vorhaus said. On June 1, the Dow Jones industrial average replaced GM with Cisco in its 30-stock index in what many investors saw as the national economy's symbolic shift away from manufacturing. "It was no coincidence," Vorhaus said.
The takeovers are patterned after previous downturns, analysts said. Cisco, which has bought three firms this year, was also among the most aggressive buyers during the downturn of the early 2000s. In 2000 alone, Cisco made 23 acquisitions, which beefed up its operations globally. Thanks to that expansion, about three-quarters of the world's digital information passes through Cisco equipment, the company has said.
As in the last downturn, Silicon Valley's biggest firms are best positioned to shop for acquisitions.
Software giant Oracle's $7.38 billion purchase of Sun Microsystems was approved by shareholders this month. Semiconductor maker Intel closed on an $884 million purchase of embedded software manufacturer Wind River Systems earlier this month.
Venture capital funding has declined, meanwhile, and it has become more difficult for small firms to raise capital through initial public stock offerings.
"You are seeing more consolidation of power," Vorhaus said, "with the bigger getting bigger and the stronger getting stronger."