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Summary:

Looks like the economy, and with it the urge to splurge, is back — especially in Silicon Valley. After a long chill, the M&A market seems to be thawing — welcome news for entrepreneurs and their backers, who have been stymied by the lack of exits […]

iStock_000003690791SmallLooks like the economy, and with it the urge to splurge, is back — especially in Silicon Valley. After a long chill, the M&A market seems to be thawing — welcome news for entrepreneurs and their backers, who have been stymied by the lack of exits and a moribund IPO market. And the recently announced deals are surfacing some interesting trends. But before we examine them, let’s just review some of the tie-ups that have been announced:

What do these deals have in common? None of them involve the usual suspects. Typically, Yahoo, Google, Microsoft and Cisco Systems are big buyers, but this time we’re seeing a whole new crop of companies looking to make acquisitions. They’re buying to:

  • Extend their current products into new markets. (VMware-Springsource)
  • Find new markets (Adobe-Omniture)
  • Ramp up their web presence. (Intuit-Mint)

What’s even more encouraging is that none of these deals are the small microtransactions that Silicon Valley got used to over the past few years, but are significant. I expect to see more of them. To buffer their businesses, I expect large companies — data center operators and networking hardware makers, in particular — to get acquisitive.

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The fact is that despite the slow comeback of the market, small technology companies are still a bargain. J.P. Morgan Research shows that small-cap stocks have declined 23 percent so far this year while large caps have increased by 3 percent. Large companies have been cutting their R&D budgets in order to get their fiscal houses in order. And they have also built up large stashes of cash. In other words, they have both the needs and the means to buy, J.P. Morgan says.

Although it seems that the technology market has been a mainstay in M&A activity, we have recently seen it all but dry up. In 2008, we note that only 45 deals were completed vs. in 2007 where we saw 94 deals completed in the internet space. However, we think acquisition multiples are much more attractive than in 2007. (“The State of the M&A Market” report by J.P. Morgan.)

Here is what J.P. Morgan thinks (and I agree) makes a good likely/potential acquisition:

  • Must-have brand (Mint)
  • Must-have product leadership (Omniture)
  • Easy to integrate (SpringSource)
  • Barriers to entry. (Omniture)

J.P. Morgan has come up with a list of possible takeout candidates, with Omniture at the top of the charts, followed by Latin American auction giant MercadoLibre. (Good call, guys.) The complete list is at the end of the post.

So what about the smaller, more web-centric startups? On that front, there is good news in the making.

  1. Brad Garlinghouse, a president with AOL, told me that he’s interested in shopping for startups that will help bulk up AOL’s communications business.
  2. In June, Google CEO Eric Schmidt told FOX Business News that he’s looking to buy technology-based companies where it’s easier to buy than build.

So now for the fun part: Who’s going to buy whom? These are my top 10 picks. Of course, you can play along by suggesting your picks in the comments. I’m not going to get into reasons — at least for now.

  1. Cisco Systems buys Sonos, the music player maker.
  2. Cisco buys some cloud computing startup such as RightScale.
  3. SugarCRM is going to be fancied by everyone from IBM to Red Hat.
  4. RIM buys Slacker.
  5. Perennial favorite: Dell buys Palm.
  6. Network Appliance, Extreme Networks and Force 10 Networks are likely buyout candidates.
  7. Microsoft buys Twitter ;-) (OK Now I’m just being mean!)
  8. Nokia buys Spotify.
  9. Electronic Arts buys ngmoco.
  10. Broadcom buys Atheros.

My outliers/unlikely deals:

  • eBay buys Etsy.
  • Cisco or RedHat buys Box.net
  • EMC and IBM become big buyers over next 12-18 months to bolster their cloud computing efforts.
  • Yahoo buys Facebook. (Not that it could happen.)
  • Yahoo buys Hulu. It really should :-)

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  1. Wow, you think Spring will be easy to integrate into VMware? That’s bold. I see a huge divide between developer driven Spring, and ITops driven VMware.

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    1. The reason I say this — after talking to folks in the know – Paul Martiz is supremely motivated and wants to make this deal work. You want to share why this would be hard. I sincerely would love to learn from you about this.

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      1. You are absolutely right that Paul is very committed to both their vCloud project as well as the Spring acquisitions. The difficulty for me is one of market and selling segments. Spring’s software will be sold to a different buyer within customers (applications group) than vSphere (server/networking group).

        If you followed #VMworld on Twitter this year you saw the thread of all of the sys-admins walking out of the keynotes when they got into the Spring deal at the end–this is again the segment issue. These guys are server jockeys and not passionate about Java frameworks. So its a new segment for both sales and marketing.

        Finally, and perhaps most importantly though is the tricky end game vision of a PaaS that goes all the way down the stack to their base tools. There just aren’t many vertically integrated stacks from server tools to application delivery– because its just such a competitive market its hard to keep control of every step. You can see this evidenced by Spring’s numerous EC2 announcements. None of this makes success impossible–but I do believe it will be tricky.

        Paul is smart and knows VMware must become a platform company, but I’m staying tuned to see how that really plays out–they are solidly a tools company today. All of this you are well aware of…just sharing my perspective on the facts. Thanks.

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  2. Hi Om,

    I agree with you that the trend of tech M&As starting to happen again is a good thing, and that a new set of acquirers are emerging is also great.

    You may also want to look at Intuit’s PayCycle acquisition: $170m: http://www.sramanamitra.com/2009/08/26/adp-draft/

    I have discussed eBay or Amazon buying both MELI and NILE: http://www.sramanamitra.com/2009/04/27/amazon-ebay-netflix/

    Now who is likely to acquire Informatica? http://www.sramanamitra.com/2009/09/16/who-will-acquire-informatica/

    I also think Salesforce.com needs to start a roll-up binge: http://www.sramanamitra.com/2009/03/10/salesforcecom-3/

    Hope you are well, Sramana

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  3. Great post on the M&A trends, Om. Here are a few others that make sense to me. The first two are small but with the right products and growing.

    – Yammer (Microsoft/Google)
    – Expensify (Intuit/Salesforce)
    – Citrix (IBM)
    – SixApart and Automattic (Adobe)
    – Rally Software (IBM/Microsoft)

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  4. how can you write an article on tech m&a and leave out Oracle?

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    1. Rob,

      that was mostly because Oracle has been buying all through the downturn, regardless of the economy. I think they are not coming back to the market, as others have. Sorry if that wasn’t clear.

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  5. Doesn’t seem as if Facebook Connect comment from before stuck. Redux in the event it didn’t.

    Great post on M&A activity. Here are a few deals that I think are possible.

    – Yammer/SocialCast (Microsoft/Google)
    – Expensify (Intuit/Salesforce)
    – Citrix (IBM)
    – Rally Software (IBM/Microsoft)
    – PBWiki (Citrix or others upstream)
    – Brightroll

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  6. …. and Avaya buys Nortel Enterprise Solutions …. Not Silicon Valley headquartered, but worth a mention.

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  7. Lots of nimble startups like us are moving faster than Google and other giants. The Peter Principle is partly to blame as deadwood clogs up management ranks at some companies (not necessarily Google where the upcoming Google Wave is going to give even our technology a run for the money).

    There is another factor that can be seen in the arrogance when so-called big-wigs and experts follow 40 people on Twitter and preen themselves like peacocks about having 20,000 followers themselves…what is happening is that they are not *listening*, even to small competitors who are following them (and listening themselves very carefully).

    This allows small companies to be like velociraptors…the non-follow behavior of the big company on a platform like Twitter is like a dinosaur not seeing the velociraptors watching and circling them.

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  8. Logitech buys Sonos and promptly kills the product with horrid customer support & product development.

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    1. My guess is Cisco-Sonos more likely. Bose never buys outside tech so this is going to be hard.

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