Booming data market to spur tech M&A frenzy in 2012

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Jim O'Neil

Bloomberg this morning reported that experts expect 2012 merger and acquisition activity in the tech industry to likely surpass that of 2011, which saw nearly $200 billion in deals, the most since 2007.

Last year's big deals, led by HP (NYSE: HPQ) acquiring Autonomy for $10.3 billion, Google (Nasdaq: GOOG) buying Motorola Mobility (NYSE: MMI) for $12.5 billion and Microsoft (Nasdaq: MSFT) purchasing Skype for $8.5 billion generated a lot of headlines, but Bloomberg says this year, for a coupe of reasons, shapes up as even more interesting.

First, expect the creation of a flood of data-enough to fill Apple (Nasdaq: AAPL)'s 2.7 billion iMacs to capacity, about 8 zetabytes, by 2015, based on Cisco's (Nasdaq: CSCOGlobal Cloud whitepaper and another report from research firm IDC.

Cisco in November said it expects that some 57 percent of all workloads will be processed in the cloud by 2014, and expects total data center data flow will be close to 5 zetabytes by 2015, and that data center IP traffic will reach 402 exabytes per month. Global data center IP traffic, it wrote, will increase fourfold over the next five years, with data center IP traffic will growing at a compound annual growth rate of 33 percent from 2010 to 2015.

How to manage that data, access and use it and store it, is going to get M&A activity popping. While companies will continue to do in-house research and product develiopment, the reality is that they can move forward more aggressively by acquiring the technology that fits their needs, saving them time and money in the long run.

ShoreTel's acquisition last week of M5 Networks (see ShoreTel acquires M5 Networks for $160M as it looks to develop cloud business) is an example of exactly that. The $160 million price tag brings ShoreTel the near-instant ability to add cloud solutions to its repertoire, bringing in new customers--M5 has some 2,000 clients of its own at the time of the deal--and new markets.

"For us to build this expertise would have taken time and investment and would certainly have involved distraction and therefore risk to our current business," said ShoreTel CEO Peter Blackmore. "We therefore determined the best way to enter this market quickly and establish a strong position is to find a company with a proven business model, a significant recurring revenue stream, a good management team and then bringing that organization into ShoreTel as a new business unit."

Privately held M5 itself made a pair of major acquisitions recently, in April buying contact center software vendor Callfinity, and in November 2010 buying hosted VoIP provider Geckotech.

"The speed at which technology innovation moves is such that you can't miss a step," Jon Woodruff, the San Francisco-based co-head of technology investment banking at Goldman Sachs Group Inc., the industry's top adviser on deals last year, told Bloomberg. "Every tool has to be used for speed and nimbleness sake, and M&A is one of those significant tools."

The second major factor in M&A, obviously, is credit availability and cash on hand. Both seem to be in adequate supply, with many companies now looking at the hoard of cash they stockpiled during the past couple of year's uncertain economic conditions.

Bloomberg estimated corporate cash levels are up 21 percent to $513 billion this year, according to the Morgan Stanley Technology Index.

Cisco, for example, has some $44.4 billion in cash on hand and has been actively buying companies for their technology (some 150 so far) in recent years. HP has just over $8 billion, although chief executive Meg Whitman said that while it's not looking for any major deals, it's open to acquisition.

Google, with $44.6 billion on hand, is likely to continue the dozen-plus-a year acquisitions it makes, while cash-hoarding Microsoft, with $51 billion, also is expected to play more aggressively in the cloud.

Apple traditionally hasn't been a big player in corporate sales, so expecting it to dabble in M&A with an eye toward a bigger piece of the cloud might be counterintuitive. But with its iPad making huge inroads in business, and its already substantial investment in the consumer cloud with its iCloud play, perhaps it's not such a stretch any more. And, it's got a whopping $97.6 billion on hand.

As more cash has been accumulated, the values of a number of potential acquisition targets have declined.

Acme Packet's (Nasdaq: APKT) slide in the market last week (see Acme Packet tumbles as Q4 falls short of expectations), exacerbated its woes; it has lost a third of its market value since October... and it's the leading enterprise SBC vendor in the space. You can add companies like F5 Networks, Juniper Networks (NYSE: JNPR) and several others to the list of firms that have seen huge chunks of valuation fall away, making them appealing targets.

Cisco releases its earnings Wednesday. If it has a strong enough showing, as it's expected to, perhaps we'll see the company kick off some new M&A activity.--Jim