Wall Street Beat: Acquisitions reflect optimism

With the Oracle-Siebel Systems and eBay Inc.-Skype Technologies acquisitions rocking IT this week, technology investors are asking whether the stage is set for more industry consolidation, and if so, what does it mean?

The Oracle acquisition of Siebel is widely seen as the inevitable final chapter in the consolidation of a mature market: There were too many big vendors trying to sell similar enterprise software to a set number of big users. But beyond that, acquisitions are often seen as a reflection of confidence, in that companies are less likely to take the chance on an acquisition in a weak or uncertain market.

In eBay’s case, the acquisition is an effort to expand into a market — voice over IP (Internet Protocol) — that appears to be ripe for growth.

For Mitchell Hollin, a partner with LLR Partners, a private equity firm based in Philadelphia, the wave of M&A activity in the last few quarters — the SunGard Data Systems Inc. $11.3 billion buyout from seven investment firms in March is another high-profile example — is cyclic.

“The nadir was three or four years ago,” Hollin said. “What we’re seeing now is a cyclic phenomenon where you have a pretty healthy stock market and a very liberal debt market. There is a general sense of optimism.”

Hollin, like most analysts, notes that not all sectors in IT will see mergers and acquisition activity.

“Its hard to say that ‘IT has matured’ when there are always segments that are maturing and segments that are new,” Hollin said. “You can’t talk about the ‘software market,’ because it’s not really a definable market, it’s too broad. Even within ERP [enterprise resource planning], you need to differentiate between the high end, and the midmarket, for example.”

On the high end, Oracle — after acquiring Siebel and, earlier this year, PeopleSoft, which had previously bought J.D. Edwards — is now pitted against SAP AG. However, the midmarket and low end of the ERP and CRM (customer relationship management) arena is still ripe for M&A activity, since it is still fairly fragmented.

In other IT sectors, storage and security products and vendors are generally expected to perform well, though that does not necessarily lead to consolidation, Hollin noted. For example, since security is still an expanding market, capital is likely to flow into new ventures, with the result that more companies will be created than acquired by other vendors, he said.

The initial take on this week’s news appeared to be optimistic, signifying that tech investors believe that the acquiring companies will achieve synergy through cost cuts and increased revenue. Oracle shares (ticker symbol: ORCL) moved up $0.21 to close at $13.49 Monday, while Siebel (SEBL) jumped $1.16, to $10.29. Also on Monday EBay (EBAY), meanwhile, rose $0.32 cents to $38.94.

After the initial rush of enthusiasm however, eBay declined $0.66 Tuesday to close at $38.28, after CIBC World Markets downgraded the e-commerce giant over concerns about how it will incorporate the company into its core business.

Still, there does appear to be an underlying confidence that is buoying the overall IT sector. Despite the devastation of Hurricane Katrina, high oil prices, and this week’s reports of poor U.S. retail sales, the tech-heavy Nasdaq closed Thursday at 2146.15, down from its four-year high that occurred mid-summer, but nevertheless still closer to the high end of its 52-week range than the low (2146.14-2155.75).