It all has a vaguely familiar feel: eBay Inc. () ponies up $2.6 billion to purchase Internet-phone upstart Skype Technologies, a company that so far seems to be more about buzz than the bottom line. Then, an hour and a half later, Oracle Corp. () announces a $5.85 billion deal for rival Siebel Systems Inc. (). Suddenly it seems Silicon Valley dealmakers, laid low by the Internet bust five years ago, are riding high again. And the betting is that there will be plenty more deals splashed across headlines before the year is out.
Indeed, the tech realm already accounts for a growing piece of a surging deal arena. Back in the bubble days, U.S. tech deals accounted for some 21% of total mergers and acquisitions, a staggering $358 billion worth, according to Thomson Financial (). With the high-tech bust, that share plunged into the low single digits by 2002, but it has risen again and now accounts for about 10% -- or some $70 billion worth -- of announced deals. Most striking, the money spent on $1 billion-plus U.S. tech deals has quadrupled in the past year, to $38 billion. "This is going to be the biggest year for tech deals since 2000," says Thomson market strategist Richard Peterson.
Yet the current wave of dealmaking is nothing like those wacky deals of tech-bubble lore when companies readily plunked down billions on skimpy business plans and unproven ideas. Whereas the 1990s tech industry resembled a bunch of passionate teenagers in a hurry to pair off, today's deals often look a lot more like sensible marriages. Says Karl Will, head of tech mergers for JPMorgan Chase & Co. (): "What you're seeing is classic maturation, where eventually there will be one or two major players in each tech subsector."
But that only partly explains what's happening. Even as the leaders in sectors such as software consolidate, others are racing to stake out a position in hot new growth areas such as Internet telephony, paid search, and wireless services. The urgency to play in these fields helps explain the big price eBay was willing to pay, even if the auction giant's strategy of building a broader e-commerce business through Skype has caused head-scratching throughout Silicon Valley.
It also explains a host of other recent tech deals, mostly involving Net-related services or content. Among them: InterActiveCorp's buy of search engine Ask Jeeves for $1.85 billion, New York Times' purchase of Internet guide service About.com for $410 million, and News Corp.'s acquisition of video-streaming service IGN Entertainment and myspace.com, the social-networking site, for a combined $1.3 billion.
Greasing the dealmaking skids are record levels of corporate cash. Microsoft () with $37.8 billion, Intel ()with $12.6 billion, Dell () with $9 billion, and IBM () with $8.7 billion all have cash to burn, should they decide to do so. Private-equity firms are also awash with resources. Kohlberg Kravis Roberts & Co. and Silver Lake Partners, for instance, were buyers in both the August $2.66 billion deal for the semiconductor unit of Agilent Technologies Inc. () and the earlier $11.4 billion purchase of SunGard Data Systems. Such private buyers "have awfully big ambitions and the financing markets today are accommodating them," says Jack Levy, head of global M&A at Goldman, Sachs & Co. ().
With many tech sectors maturing, consolidation will be the name of the game. Just look at telecom in the past year: SBC Communications snatched up AT&T, and Verizon () snared MCI. Lenovo's buy of IBM's PC unit falls into much the same camp: Some now think the combined company could scoop up struggling Gateway.
For Oracle, the Siebel deal is just the latest in a series of purchases, with an estimated value of more than $17 billion, orchestrated by CEO Larry Ellison over the past 10 months. His goal: to beef up Oracle's business-software offerings in the face of a maturing industry and a shift by corporate buyers toward one-stop shopping. Ellison's frenzied dealmaking has many in the industry wondering if Oracle can digest it all, but so far, it seems to be working. Its 2004 deal for PeopleSoft is already bearing fruit. When Oracle announced its fiscal fourth quarter in June, revenues in the key business-software-applications market shot up 52%. That leads many to believe the PeopleSoft integration has gone smoothly.
After snapping up PeopleSoft, Retek, and a clutch of smaller targets, Ellison figures the new deal will help him face off off against German business-software titan SAP (). It also gives Oracle a foothold in areas where it was weak. Siebel, for instance, is a potent force in serving financial services and telecom companies, unlike both Oracle and SAP. Siebel is also the technology leader in customer-relations management software, a field where Oracle has lagged behind. So Oracle will be able to pitch a bigger base of customers on a fuller array of products. Still, competitors snipe that dealmaking can get Ellison only so far. Says SAP CEO Henning Kagermann: "He says he wants to be closer to No. 1. But how can he become No. 1 when there are no other major acquisition targets left anymore?"
The purchase of Skype is a different story altogether. The Internet is in the midst of a new mini-boom. And with cash-rich Internet pioneers eager to stay on their growth trajectory, they're grabbing upstarts in hot new segments with abandon. In recent months, Yahoo! swallowed photo-sharing site Flickr and Internet-phone startup Dialpad, while Google () collected mobile-services startup Dodgeball and wireless-phone-software company Android. Last year, eBay pocketed comparison-shopping site Shopping.com and home-rental site Rent.com. In much the same way, the Technorati blog search firm could be a promising target for a buyer such as Microsoft, while Facebook, the college-student social networking site, could appeal to a Net-savvy outfit such as News Corp. ().
EBay is betting that Skype will plug the big online-auction company into several new revenue sources. For one, sellers who use eBay's auction site and tack a "Skype Me" button on their listings would pay eBay a fee every time someone clicks through and connects via Skype -- a business eBay thinks can eventually generate $3.5 billion. And venues, such as eBay's newly created Kijiji international classified-ad site, could generate revenue from such leads. Finally, eBay figures Skype's core business in Internet phone communications will be a moneymaker. Skype connects people computer-to-computer for free, but charges for linking PCs to phones and voice mail. On tap: fresh services such as videoconferencing.
"WE THOUGHT HARD"
Skype is racking up sharp growth, but only a modest payoff. The Luxembourg outfit garnered $7 million in revenues last year and says it is on track to hit $60 million this year and $200 million in 2006. By the end of September, it expects to count 54 million customers. "We thought hard about stepping out into the communications space," says eBay Chief Financial Officer Rajiv Dutta. "But assets like this don't come up for play so often."
That gamble is hardly cheap. The deal's initial price tag -- $1.3 billion in cash and the same amount in stock -- will grow to $4.1 billion if Skype reaches certain performance goals by 2009. That's a lot of money for a company that isn't expected to reach breakeven until late 2006.
Still, it's money eBay execs seem happy to pay. "The reality is there's less risk in the Internet today, so it's appropriate that prices are higher," says Dutta. With both the technology and the business models of Internet powerhouses such as eBay and Google Inc. proven quantities now, deal boosters say, emerging Net companies may inevitably command higher prices.
Of course, there are still plenty of skeptics out there. When news of the Skype deal broke, "I had to check my calendar to see that it was 2005 and not 1999 or 2000," jokes Peter Falvey, managing director of the Boston investment banking boutique Revolution Partners. Falvey is among a growing chorus of critics who worry that the Skype deal smacks a little too much of the frenzied dealmaking and lazy thinking of the late 1990s.
But who knows? Maybe this time around, all those folks so eager to put their money to work in tech deals have got it right. Either way, there's no doubt that a lot more deals are coming down the pike.
By Joseph Weber and Robert D. Hof, with Sarah Lacy in San Mateo, Calif., Emily Thornton and Roben Farzad in New York, Andy Reinhardt in Paris,
and bureau reports