News March 25, 2008, 5:38PM EST

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

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Yet tech firms consider deals alluring not just because prices are low but also because targets' buyout alternatives are dwindling. Venture capitalists are placing higher demands on cash-strapped startups that are reluctant to enter a murky IPO market. "With venture firms and management teams less optimistic on their prospects and more realistic on valuation, there will continue to be very heavy activity for major acquirers," Howe says. Some of last year's most promising tech IPOs, including VMware (VMW) and NetSuite (N), are well off their highs.

Cash-rich tech titans can offer decidedly more enticing takeover terms. Microsoft, along with computer maker Hewlett-Packard (HPQ) and networking gear giant Cisco Systems (CSCO) together have more than $125 billion in cash. "We will continue to look at new opportunities," says Mike Galgon, chief advertising strategist for Microsoft's advertiser and publisher solutions group. This year, Microsoft has made four purchases unrelated to Yahoo, including Danger, a maker of mobile-phone software, for an undisclosed amount. Microsoft is likely to make other purchases to beef up its Web search and online advertising businesses.

Software Binge

Oracle is expected to keep up its big-player role in the continuing wave of software consolidation, as clients increasingly look for a single provider that can provide a range of applications that work well together. HP has joined the software buying binge, recently announcing plans to acquire Exstream Software for an undisclosed amount. Last year HP paid $1.6 billion for data software maker Opsware. Another potential software target is Lawson Software (LWSN), a supply-chain and customer-management software provider that has seen its stock drop 27% since its January high of $9.94. "The consolidation has been vigorous at the top," says Marc Benioff, CEO of online software provider Salesforce.com (CRM). "This trend will keep the investment bankers busy."

M&A bankers catering to Web companies may have their hands especially full. One Web company probably on buyers' short lists is Digg. Under a partnership announced last year, Microsoft has paid $100 million for the exclusive right to place ads on Digg pages. Analysts say Microsoft may want to buy Digg outright. Both companies decline to comment on the speculation, though Digg CEO Jay Adelson concurs that for many Web companies, getting bought would be better than doing an IPO in 2008. "I think the IPO market for companies like Digg and companies smaller than Digg is not as big," Adelson says. "Acquisition is a much easier exit for many of these companies."

The Skype debacle behind it, eBay is hoping for more successes like PayPal, the online payment service it purchased for $1.5 billion in 2002. The company generated $563 million in revenue in the fourth quarter of 2007 alone, prompting retiring eBay CEO Meg Whitman to call PayPal a "gem of a business." McDonough embarks on this year's spree mindful that with some deals, timing is everything. Her company snapped up PayPal in the wake of the tech meltdown—another good time to find bargains.

With Peter Burrows and Aaron Ricadela in Silicon Valley

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