After the technology sector boom of the late 1990s went bust, M&A deals in the sector declined. Technology investment is once again on the rise, with both corporate and private equity buyers making acquisition deals in the sector. Start-up companies and evolving business models such as shareware and open source software are popular targets.
Corporate buyers are using acquisitions to expand their technology offerings. Computer hardware giant Hewlett-Packard recently signed an agreement to acquire software developer Silverwire Holding. Silverwire, based in Switzerland, specializes in digital imaging systems for commercial photo kiosks, mobile imaging, and personal photo management. Last March, HP acquired Snapfish.com, an online photo service. Both deals are part of a Hewlett Packard strategy to focus on the consumer digital imaging market.
Washington state company 180solutions has announced the acquisition of Hotbar, a New York company that distributes electronic wallpaper, emoticons, and other content in exchange for having users download a toolbar into their browser or email applications. 180solutions makes adware - applications that users agree to download in exchange for free content. The applications monitor the computer's use, allowing for targeted advertising. The acquisition increases the library of products 180solutions can offer to accompany its adware applications.
The acquisition made by 180solutions was a technology deal, but adware is also tempting as a growing business model. Adware is an attractive business model because it allows capital to be generated from products offered to the consumer for free. The downside is that adware is associated with spyware, monitoring applications that are downloaded without the consumer's knowledge or consent. Many advertisers remain leery of being associated with adware or spyware. hotbar. which operates under the consumer name Zango, is proof that the model can work. The company reported S50 million in revenue in 2004 and claims to have been profitable for 16 quarters. If adware continues to grow in popularity, more investment in the business model can be expected.
Adware is not the only unusual business model in the technology sector. Business models associated with open source software - code that is open to developers and freely distributed - are rapidly evolving. Revenues for open source developers generally come from application support services that can be sold on a subscription or consulting fee basis. In contrast, more traditional software companies make money on the sale and licensing of their base products.
The open source model is also drawing corporate technology acquisitions. Red Hat Inc., which makes applications and content for open source operating system Linux, recently acquired Java application-server developer JBoss Inc. JBoss allows its open source application-server to be downloaded free online. The company makes money by helping clients implement its products in software development projects. In February, Enterprise software giant Oracle acquired Sleepycat, an open source embedded-database company.
Consolidation in the open source sector is likely to continue. The Oracle acquisition shows that traditional software companies recognize that revenue can be generated with the application support model. Significant open source companies that might prove likely targets include SugarCRM, MySQL, and JasperSoft. Consolidation will likely be driven by large corporations seeking to own larger portions of the software sector.
Software corporations are not the only players in the technology sector. At the JP Morgan Chase Technology Conference recently held in San Francisco, executives from leading private equity firms predicted that leveraged buyouts in the technology sector would reach new heights over the next two years. Gene Frantz of Texas Pacific Group stated that a technology deal worth S25 billion to S35 billion could be seen in the next 12 to 18 months, made possible by the current availability of debt capital.
Capital markets are once again willing to risk investment in the technology sector. New Venture Partners LLC, an equity investor specializing in corporate technology spinouts, has announced the closing of a $275 million fund - an amount exceeding the fund's original goal of $200 million. The rise of deal activity in the sector made fund-raising easier. New Venture Partners recently made two successful exits with the sale of portfolio companies Flarion Technologies, which sold to Qualcomm for $805 million, and SyChip Inc., which sold to to Japan's Murata Corporation.
According to Jim Davidson, managing director of technology buyout specialist Silver Lake Partners, several private equity firms have raised new funds with more than $10 billion in assets. As a result, larger acquisition targets have become possible. Last year, Silver Lake teamed up with other private equity firms including Blackstone Group, Kohlberg Kravis Roberts, and Bain Capital to make the largest technology buyout ever - the roughly $11 billion acquisition of SunGard Data Systems.
With both private equity and corporate buyers pursuing the technology sector, deal activity is likely to continue. Corporate buyers are seeking new technologies, markets, and business models, and corporate acquisitions provide handy exits for equity investors. If the predications from the private equity sector are true, the next few years will see even larger technology sector deals.
