Consolidation sweeping across tech sector By Jessica Guynn CONTRA COSTA TIMES Oct. 15, 2003 Craig Conway kicked it off in June, announcing PeopleSoft Inc. would pay $1.8 billion for rival software maker J.D. Edwards. Larry Ellison quickened the pace a week later with his multibillion-dollar surprise takeover attempt of PeopleSoft Inc. Now the urge to merge seems to be making a comeback throughout Silicon Valley as technology heavyweights with plenty of cash position themselves for an economic rebound, picking off smaller software companies to expand into new markets and new technologies. "Consolidation is occurring across the market," said independent technology analyst Rob Enderle. "With valuation of independent companies at all-time lows, firms that have some money are using their shop-til-you-drop card." EMC Corp. is a case in point. In its first major acquisition in years, EMC snapped up Legato Systems in July, paying $1.2 billion to shore up its business as competition ramped up in data storage. Now its $1.7 billion stock swap with Documentum Inc. helps EMC, which makes big storage devices, expand into a growing software niche, analysts say. Brent Bracelin, senior research analyst with Pacific Crest Securities, said the deal looks like a winner for EMC, which gives up 5 percent of the company in exchange for a revenue increase of 4.6 percent. "More importantly, EMC is acquiring a higher-margin business, a faster-growing business and a category leader in content management," he said. It's a deal that makes sense for Documentum, too, as competition heats up in content management, said venture capitalist Jeff Miller, Documentum's chairman. The tables turned quickly on the Pleasanton software maker, which before EMC made the offer had itself gone on a buying binge in the last few years to bulk up. "We've been looking at ways to get big. We were coming to a point where size was going to matter given some of our other competitors. We had acquired some companies and had gotten bigger that way. We were looking at other acquisitions we could do. Then this opportunity came along," Miller said. "We were not necessarily looking for consolidation nor were we afraid of it." Increased merger-and-acquisition volume indicates rising confidence in corporate boardrooms, analysts say. "Companies that survived the downturn are going out and acquiring smaller niche players in the industry to put themselves in a better position to benefit from a rebound in (technology) spending," Bracelin said. "You're seeing companies that have strong balance sheets start to put those to work. They are going out and doing a land grab to find complementary companies that can augment their business when (technology) spending comes back in 2004." With some 700 companies, business software in particular is ripe for consolidation, Bracelin and other analysts say. The unparalleled influx of cash during the dot-com boom sped up innovation "three to five years ahead of normal investment returns," but also led to excess capacity, said Marty Wolf, president of San Ramon-based investment bank Martin Wolf Securities. "You will see concentration in this space that people can't imagine," he says, estimating that in two years, half of the software companies "that we know" will meld into the technology landscape. In five years, 90 percent will vanish, Wolf expects. Rising stock prices in addition to increased business confidence and low valuations will drive consolidation, Wolf said. EMC's stock, for instance, has more than tripled in the past year. So buyers like EMC can lure their targets with attractive offers, banking that after a long period of retrenchment share prices will continue their climb and validate the deals. EMC will pay a 29 percent premium for Documentum. This merger spurt does not augur another major dealmaking wave like the one that swept the technology industry during the dot-com boom, analysts caution. Merger-and-acquisition volume has sunk 15 percent to $315 billion so far this year, said Richard Peterson, chief marketing strategist at Thomson Financial in New York. He predicts this year's total will be flat or below last year's total of $430 billion and far below the 2001 total of $770 billion. But after a three-year lull, Peterson does see signs that activity has picked up. "It may bode well for 2004," he said. Still, even under the most bullish of economic circumstances, mergers face significant hurdles. "The problems often come from areas you don't expect: systems that don't work together, cultures that clash, rules that don't translate well from one company to another, conflicting compensations plans, and unclear leadership," Enderle said.