Tech M&A: The Long, Cold Winter May Be Over

From Silicon Valley to Wall Street, the talk since June 6 has been dominated by Oracle (ORCL ) Corp.'s takeover bid for rival software maker PeopleSoft (PSFT ) Inc. Put together Oracle's eccentric CEO, Lawrence J. Ellison, and a rare -- for tech -- hostile $6.3 billion offer, Hollywood couldn't have come up with a better script.

Oracle's move is having real-life repercussions across the tech sector. Companies that were confident about riding out the downturn are feeling vulnerable. "This deal has rocked people out of that false sense of security," says Paul Deninger, chairman and CEO of New York-based Broadview Holdings, a tech investment bank. "Everybody knows they could be in play, and they have to think differently."

Many already are. Investment bankers say their phones have been ringing off the hook and their workloads have shot up in the last month. Suddenly, wide-open calendars are packed with brainstorming sessions. Merger discussions that were lukewarm at best are heating up. "Larry broke the logjam," says Jeff Mortara, head of West Coast technology investment banking at Deutsche Banc Alex. Brown (DB ) Inc.

Ellison isn't the only catalyst, of course. With tech stocks on a sustained upward trajectory, execs are sensing that valuations have finally bottomed out. Low interest rates are also helping buyers raise capital more easily. And they've finally begun to focus on growth instead of cost-cutting.

So where's the action likely to happen? Look no further than industry heavyweights such as Sun, IBM (IBM ), Microsoft, and Cisco Systems (CSCO ). It's not just that these companies have mountains of cash. They are also seeking technologies that can open new markets and revenue streams. Take the June 26 acquisition of Pixo Inc. by Sun Microsystems Inc. The San Jose (Calif.) upstart's technology makes it easier to send digital content to mobile devices. Sun, which expects to do at least three more deals by yearend, wants to incorporate Pixo's software into its wireless strategy.

Another area that's ripe for dealmaking is corporate software, with more than 700 players. "For the last 12 years, the one thing you could count on is that no deal happened in software except when a company was in distress," says Roger B. McNamee, a technology investor at Silver Lake Partners in Menlo Park, Calif. "So it's a virgin field, with massive excess capacity."

Don't expect an avalanche of deals overnight, though. Any significant rise in volume isn't likely to show up until late this year or early 2004. Instead, companies will spend the next few months mapping out strategic initiatives and identifying acquisition targets. That may be good news for investment bankers, who are hoping to end a nearly three-year lull. But for PeopleSoft and other companies that would rather go it alone, it's time to watch their backs.

By Linda Himelstein and Jim Kerstetter in San Mateo, Calif.

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