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Enterprise IT Deals To Drive Tech M&A

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Technology bankers are placing their bets on combinations around enterprise information technology (IT) offerings, which they say will spearhead dealmaking in coming months.

The next few months could see network equipment giant Cisco Systems Inc making a play for a data storage company like NetApp Inc; services behemoth International Business Machines Corp going after a content delivery network provider like Akamai Technologies Inc; and server maker Hewlett-Packard Co courting a network gear maker like Juniper Networks Inc, bankers said.

"The big technology companies are all getting into each others' businesses," said Peter Falvey, managing director at investment bank Revolution Partners. "The traditional lines have broken down, and competition is getting fierce, because they're trying to do what they can to keep customers."

The turf war has already begun. Dell Inc, whose hardware has long been a data center staple, recently entered the IT services business with its Perot Systems Corp acquisition, while business software maker Oracle Corp jumped into the hardware market with its Sun Microsystems Inc buy, declaring war on IBM.

"Any combination is possible," said one West Coast banker. "If you line up the No. 2 to No. 10 players in any part of the enterprise stack, and then see which of the big guys have gaps in their portfolios, you can begin to see where deals might be possible."

Bankers listed Juniper, the No. 2 networking equipment maker after Cisco, F5 Networks and Brocade Communications Systems Inc as their top picks for HP or IBM, which could be compelled to beef up their networking presence because Cisco is moving on to their server turf.

Information management specialists like Autonomy and CA Inc are also good targets for IBM, SAP and Oracle, bankers said. They spoke anonymously because many of these companies are clients.

Meanwhile, Cisco could now feel pressure to own a services company, since rivals HP, IBM and Dell all do. Bankers and analysts have suggested Accenture Plc as a candidate for Cisco, although with its $23 billion market value, it would be an expensive acquisition.

Fair Game
The field is wide open because some of the biggest technology companies have recently begun expanding beyond their traditional businesses, stepping on each other's toes to offer corporate customers an array of IT products and services.

These moves come as growth rates at many tech companies have begun to plateau, forcing management to search for new opportunities. Much of that focus has been on the data center -- the IT nerve center of the computer-dependent corporation -- which has seen a lot of innovation, such as storage and software virtualization.

Companies are also jostling to fulfill their customers' soup-to-nuts needs, in response to growing demand for simplified, integrated solutions, said Peter Bell, a venture capitalist at Highland Capital Partners.

"Customers are truly looking for less throats to choke," Bell said. Tech companies began scrambling to offer a range of IT products and services because it allows them to control large chunks of the customers' IT budgets, he added.

Tech bankers consider all data center functions ripe for mergers and acquisitions, including networking, storage and security. Software delivered over the Web, business analytics, hardware and software companies that provide so-called plumbing for Internet-based computing -- are also attractive categories.

"There is a natural constraint for companies with $200-$300 million in revenue to go up to $1 billion," said the West Coast banker. "That's where dealmaking happens," because sellers realize they cannot scale their business quickly enough on their own and risk losing market share to bigger players.

Have Money, Will Buy
The recession dampened everyone's appetite for M&A, as buyers preferred to hold on to their cash and sellers were unwilling to strike deals when stock markets were off.

That's no longer the case. As the economy improves, bringing back stable markets and easier access to credit, bankers say they are seeing a new willingness among senior executives at tech companies to do deals.

And they have the firepower to do it.

Large US tech companies, with market capitalizations greater than $20 billion, collectively had about $200 billion in cash and cash equivalents at the end of June 2009, said Amity Millhiser, a partner at PricewaterhouseCoopers Transaction Services.

But most deals announced over the next few months are likely to be under $10 billion, bankers said.

(Reuters)


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