Tech M&A: It'll Be a Good Year

As company valuations tumble, big players like eBay and Oracle see lots of potential bargains, while targets see fewer buyout alternatives

by Catherine Holahan

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Executives at eBay (EBAY) know a bargain when they see one. For Lorraine McDonough, eBay's mergers chief, 2008 is shaping up to be a good year to go shopping. Banks are reining in credit, relegating competing private equity firms to the sidelines, and stocks are tumbling, taking a bite out of asset prices. "We are in a good position to make acquisitions," McDonough says.

The e-commerce company kicked off the year with the purchase of payment-security firm Fraud Sciences for $169 million and expects to make eight or nine acquisitions this year, roughly twice the usual target tally, McDonough says.

Tech buying fever is catching. At the end of January, Microsoft (MSFT) made an unwelcome $44.6 billion bid for the troubled Web media portal Yahoo! (YHOO), the largest tech takeover attempt of the decade. That same month, business-software maker Oracle (ORCL) said it would spend $8.5 billion on rival BEA Systems, and in mid-March Time Warner's (TWX) AOL unveiled the biggest-ever acquisition of a social network, agreeing to spend $850 million on Bebo.

Flush with billions of dollars in cash, and with virtually no debt, tech bellwethers are stepping up the dealmaking as a slowing economy and market malaise cut valuations. In dollar terms, high-tech mergers and acquisitions have surged 132% this year through Mar. 25 from the same period a year earlier, according to Thomson Financial (TOC). Tech companies "are absolutely bargain-hunting," says Benjamin Howe, CEO of investment bank America's Growth Capital.

Beyond Tech

Tech firms aren't alone. Deals are up in finance and the steel industry, too, although more modestly. JPMorgan Chase's (JPM) Federal Reserve-subsidized offer for Bear Stearns (BSC) reflects the consolidation of an industry beleaguered by subprime lending gone awry. Steelmakers are combining amid rising prices for commodities. Still, for most industries, these are dreary days for deals. The value of M&A has tumbled 51% this year, with the sharpest drops in telecom, consumer staples, and real estate.

And while deal prices in tech and other industries may look attractive now, they could fall further if the economy continues its slide. Recent reminders of the dangers of overestimating potential revenue benefits and cost savings of a deal include Sprint's (S) $30 billion loss to reflect the writedown of almost the full purchase price of Nextel, acquired in 2004. EBay recorded a $1.4 billion charge on Skype, the Internet calling outfit it bought in 2005.