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Posted at 9:59 p.m. PST Monday, February 1, 1999
Splurge To Merge
Net, telecom firms scramble to get bigger
BY DAVID A. SYLVESTER
Mercury News Staff Writer
The soaring stock market and a merging of markets has unleashed
a scramble to get bigger among Internet and telecommunications
companies, creating a series of multi-billion-dollar deals that aren't
likely to slow down soon.
In January, three local mergers -- Yahoo-GeoCities Inc.,
@Home-Excite Inc. and Uniphase-JDS Fitel Inc. -- will be worth,
when completed, $13.8 billion -- about 85 percent of the total
value of all last year's mergers and acquisitions in Silicon Valley.
Nationally, the value of mergers topped $130.9 billion in January,
higher than any other January of this decade.
If the trend holds up, 1999 could be the fifth year in a row of
record-setting deals, surpassing 1998's mark of $1.4 trillion of
announced U.S. mergers.
While the merger mania nationally is driven by excess capacity in
traditional industries such as autos and oil, it also reflects the
competitive pressures and early adolescence of the younger
technology industries. Despite a history of flopped mergers,
companies often haven't enough time to broaden their business,
enter new markets and stay abreast of the competition on their
own without acquiring other companies.
''Mergers and acquisitions are as much as part of information
technology as silicon,'' says Alec Ellison, a managing director of
Broadview International, an investment banking firm tracking
worldwide mergers. ''Dislocation of the markets creates
opportunity and that drives mergers and acquisitions.''
For Silicon Valley, this current wave of consolidations looks similar to those of previous bursts in
the semiconductor, computer and software industries, as companies struggle to stay ahead.
''This valley has gone through at least four dynamic bursts of growth,'' says Doug Henton,
president of Collaborative Economics, a regional research firm in Palo Alto. ''Each time you see a
natural process of mergers and acquisitions as part of the cycle.''
Three forces are driving this new wave of mergers: the
high-priced stock market, a collapse of market barriers
and the increased speed of technological change.
Stock market: Although it would seem that expensive
stocks would make mergers more expensive, it has the
opposite effect. The market is allowing companies to use
their high-priced shares to buy other companies, in the
same way rising prices of homes enable homeowners to
trade up into larger, more expensive houses.
Still, analysts wonder at a world that values GeoCities
Inc., a four-year-old Internet company still losing money,
at $5.2 billion, close to the $6.5 billion that Ford Motor
Co. plans to pay for the auto operations of Sweden's AB
Volvo.
''The value that can be created by the two companies
coming together doesn't have any relation to the
transaction price,'' says Chris Charron, an Internet analyst
at Forrester Research Inc. in Cambridge, Mass. ''Yahoo
could have done better for its shareholders.''
Market barriers. With governments easing barriers, smaller markets are joining into larger,
more dynamic markets. The newly deregulated telecommunications industry is undergoing a
convergence of the datacommunications and telecommunications worlds. As a result, the old-line
telephone maker, Lucent Technologies Inc. sought to acquire Ascend Communications as a way
to compete directly with Internet equipment supplier Cisco Systems Inc. of San Jose.
The larger markets are one reason for the size of increasing deals. In Silicon Valley, the average
size of a merger rose from $51.6 million in 1996 to $134.6 million last year, tracking almost
exactly the same trend in the nation, according to figures from Collaborative Economics, the Palo
Alto research firm.
Technological change. The
continued invention of new
methods of doing business, now
through the Internet, has
destabilized the traditional
industries from automobiles to
book-selling and sped up the
change among markets.
The century-old auto industry is
a leading example. The new
computer-aided design
technology is speeding up the
design and development of
autos, increasing competition.
''It used to take five or six
years from drawing board to
product and now it's 24
months,'' says George Peterson, president of AutoPacific, an auto marketing and research
company in Santa Ana.
And as the use of the Internet broadens, it will change how a range of businesses function, in the
way Amazon.com has changed book-selling and E*Trade Group's has transformed stock trading.
''We're just beginning to see the impact of this technology,'' says Erik Brynjolfsson, a professor
and director of the e-commerce marketing program at Massachusetts Institute of Technology.
Despite their recent popularity, however, the history of mergers is littered with failures. Last year,
as it prepared to acquire Chrysler, Daimler-Benz found that 70 percent of international mergers
proved disappointing. In 1987, a study by Harvard Business School professor Michael Porter
found that more than half of the 3,788 companies acquired between 1950 and 1986 ended up
being spun off again.
In Silicon Valley, one notable flop was the IBM's purchase of Rolm in 1984 for $1.3 billion -- the
biggest local acquisition at the time. The staid IBM culture clashed so severely with the fast-paced
Rolm that Rolm hemorrhagged red ink. Four years later, IBM sold most of Rolm to Siemens A.G.
for a price estimated at less than half of the acquisition cost and dumped the reminder in 1992.
Despite the difficulties in combining companies, the need to move into a market quickly and at a
cheap price fuels the drive to merge. Last year, Cisco Systems Inc. announced 10 mergers, most
valued at less than $200 million. These included Lightspeed International Inc., Precept Software,
Netspeed Inc.
''It's very hard to name a leading IT competency that hasn't had mergers and acquisition as an
important part of their growth,'' says Ellison. ''You have to think externally as well as internally''
for growth.
Moreover, the stock market is making it easier to look externally.
''Market leaders are wanting to cement their lead, especially in the media-telecom area,'' says
Todd Jadwin, managing director with BankAmerica Corp. told the Los Angeles Times. ''It's hard
to justify internally growing something when it's cheaper to buy.''
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