Uptick in M&A activity a good sign for tech

While consolidation can be a sign of a mature, slowing market, the M&A activity happening now, especially seen in context of this week’s six-year Nasdaq Composite Index high, signals confidence in IT and prospects for growth.

High-tech mergers and acquisitions hit a record number last year and the trend continues.

Wednesday, Cisco Systems announced it will make a $135 million acquisition of Reactivity, a maker of XML gateway and security hardware to manage Web services. Tuesday, SAP said it would acquire Pilot Software, a supplier of strategy management software, while Wind River Systems said it bought FSMLabs’ embedded Linux technology for real-time applications.

SAP rival Software AG said Wednesday that it will be focusing on SOA products and services and plans acquisitions to broaden its product portfolio.

Companies outside of traditional enterprise IT are also part of the M&A trend. Satellite radio operators Sirius Satellite Radio and XM Satellite Radio Holdings, with total revenue of about $1.5 billion, announced Monday that they plan to merge.

Though different sectors within IT are subject to unique market situations, globalization and trends in financing are the prime forces driving M&A, according to Eric Gebaide, managing director of Innovation Advisors, a New York investment firm.

After the “general meltdown” in 2001, it’s been hard for small companies, especially those under $75 million in revenue, to go public, Gebaide said. This makes them acquisition targets.

“Another factor is the need to start having global solutions,” Gebaide said.

The globalization of technology is underscored by an Innovation Advisers study, based on using data sourced from Capital IQ, a division of Standard & Poor’s, that shows that the total percentage of U.S.-based companies participating in M&A activity continued to decline to 51.6 percent from 57.9 percent in 2005.

Overall M&A transactions hit a record last year: The total number of transactions in 2006 was 4,669, exceeding 2005’s total of 3,455, and the 2000 total of 2,871 deals at the peak of the dot-com boom, according to Innovations Advisers. But the total amount of dollars spent on M&A last year was less than in 2000: $295.8 billion, while the 2000 transaction total was $490.3 billion.

Company valuations are more reasonable now than in 2000. Recent deals show software companies are being valued at two to four times revenue, while service companies are valued at one to two times revenue, Gebaide said. Historically, these numbers are more normal then the valuations of the dot-com boom.

Meanwhile, services companies are forecasting solid revenue growth this year — a sign that users are investing in IT, Gebaide points out.

The Nasdaq close on Wednesday, at 2518.42, was the highest in six years. On Thursday it closed up again, at 2524.94. Coming right after earnings season, this is another sign that confidence is high.

Although overall global revenue growth in IT is expected to be modest compared to the dot-com boom — most estimates peg IT growth this year at about 6.5 percent — the expansion is likely to be more sustainable than it was seven years ago.

Though the IT market may not be as exuberant as it was in 2000, many investors are certainly willing to settle for more stable, rational growth.