M&A News Dominates Tech Market Turmoil

Merger and acquisition sagas involving Yahoo, 3Com, and Iomega grabbed the attention of IT investors this week as economic news took tech companies on a turbulent market ride.

Continuing efforts to remain independent or force Microsoft to bid higher, Yahoo Monday revealed a three-month-old financial presentation originally prepared for its board of directors in December. Yahoo said it will double its operating cash flow from US$1.9 billion to $3.7 billion over three years. Shares of Yahoo jumped by $1.81 to close at $27.66 Tuesday.

Microsoft announced its unsolicited cash-and-stock bid for Yahoo, originally valued at $44.6 billion, on Feb. 1. Yahoo rejected the offer, saying it undervalued the company, and proceeded to hold talks about strategic deals with companies including AOL and Google in an attempt to stave off Microsoft.

Many industry insiders think the deal is a must for Microsoft, which has seen Google lengthen its lead in online advertising.

"Buying Yahoo may be Microsoft's only game-changing option in the Internet sector," Citi Investment Research's Mark Mahaney and Brent Thill wrote in a research note this week.

One of the reasons Microsoft covets Yahoo is for the online company's shares in Asian Internet companies, but trouble may be brewing on that front. Alibaba, a Chinese Internet company in which Yahoo has a 39 percent share, is reportedly negotiating with investors to buy out the American company's stake if Microsoft's bid goes through, according to a report in the Wall Street Journal.

This week, several deals among Chinese and U.S. companies fell apart. Multimedia storage device maker Iomega said Monday it would begin acquisition talks with storage giant EMC, effectively putting an end to negotiations with Chinese companies ExcelStor and GreatWall Technology. EMC, which had previously made a bid that Iomega considered too low, sweetened its offer in a deal now worth $205.5 million. Iomega shares rose $0.38 to $3.64 on the news Monday, although they then settled back down by the end of the week.

A $2.2 billion bid by Bain Capital Partners and China's Huawei Technologies to buy U.S. networking company 3Com fell through because of security concerns. Bain announced Thursday the companies would give up their attempt to structure the deal to meet concerns of the U.S. Committee on Foreign Investment in the United States (CFIUS). The U.S. Department of Defense uses 3Com security products.

As concerns about the U.S.economy take share prices on a roller coaster ride, M&A news will continue to pique interest of investors looking to make money by buying into takeover targets. Private equity acquisitions and leveraged buyout deals (those based on credit) have dried up in the wake of the U.S. housing market collapse and the resulting havoc in financial markets. But IT vendors themselves are still flush with cash after several years of record earnings.

"The steady string of corporate deals -- both transformative and as a means of market consolidation -- more than made up for the utter collapse of the tech leveraged buyout (LBO) market after the summer," noted a 451 Group report on M&A in the last quarter of 2007.

This week was no exception to the tumult of the last few months. On Tuesday, as investors cheered yet another U.S. Federal Reserve Board credit rate cut, the tech-heavy Nasdaq jumped 91.25 points to close at 2209.96, its largest point gain since 2002. The market sank Wednesday as some investors cashed in on their gains, and then shot back up Thursday as the Philadelphia Reserve Board reported that manufacturing activity looks stronger in March than in did last month.

Even though the Nasdaq ended up closing at 2258.11 Thursday, up by 2.1 percent on the last day before markets closed for the Easter long weekend, more turmoil is expected. The latest consumer spending survey from ChangeWave Research this week shows the largest decline the poll has seen in U.S. consumer retail spending on electronics since 2002.

ChangeWave reported that 33 percent of those polled said they would spend less over the next 90 days on items such as iPods, digital cameras and video game consoles.