A year ago, BEA Systems looked like a company on the rise. The business software maker was ranked No. 44 on the Silicon Valley 150, the Mercury News’ annual list of the region’s largest public companies. It announced plans to buy a handsome-yet-vacant tower in downtown San Jose as its headquarters, putting its logo a few blocks from Adobe Systems’.
Now BEA is on the verge of becoming a memory. Like Seibel Systems and PeopleSoft before it, BEA is being absorbed into the empire of Larry Ellison, founder of Oracle and the valley’s wealthiest tycoon. BEA has now disappeared from the SV150 and that downtown high-rise still needs a tenant.
Next year, valley icon Yahoo may disappear as an independent company as well. If Microsoft succeeds in its $40 billion-plus acquisition bid, the familiar Yahoo brand may live on as a subsidiary of tech’s biggest corporate empire.
Change is a constant in Silicon Valley – and while that may sound like a cliche, it seemed especially true in the past 12 months. A year ago, bullish attitudes prevailed, fueling a rebound in initial public offerings (IPOs) and attractive valuations in mergers and acquisitions (M&A).
What a difference a downturn makes.
In a vibrant economy, Silicon Valley start-ups and venture capitalists are able to weigh a range of strategic options, from an IPO to multiple merger possibilities. But the plummeting stock market has put IPOs on hold, and the credit crunch has put big private equity firms such as Blackstone, the Carlyle Group and Kohlberg Kravis Roberts on the sidelines, said senior analyst Brenon Daly of the 451 Group, which tracks tech M&A activity.
A year ago, Daly pointed out, KKR needed only a week to line up seven banks to underwrite debt for a $29 billion purchase of First Data. But when summer came, the subprime mortgage collapse rippled into a broader credit crunch, putting some pending deals in jeopardy and forestalling new ones. “We saw the deal flow tick down,” Daly said.
Later came the plunge on Wall Street, creating more distress.
The economic downturn will slow the pace of M&A, agreed Jeff Embersits of Shareholder Value Management. “The macroeconomics isn’t great, the cost of debt has increased, and there are just fewer players out there.”
Previously, BEA had built much of its own success through acquisitions. But the movement toward consolidation means there are fewer medium-size companies seeking acquisitions. “There just aren’t as many obvious deals,” Embersits said.
The new landscape favors big, acquisitive companies like Google, Cisco Systems, Hewlett-Packard and Microsoft, analysts agree.
“They have the leverage in negotiations. They have companies coming to them wanting to be bought,” Daly said. “Right now, they’re the only game in town.”
Many tech companies, including Cisco, Google, Yahoo and Microsoft, tend to focus on “tuck-in” acquisitions – buying small companies, often unprofitable start-ups, that have a technology and talent to complement their core business portfolio. The market for such tuck-in deals may not significantly decline, but deals may take more time to close, Daly said.
Oracle, meanwhile, engages in a more traditional consolidation strategy. Ellison has targeted established companies with strong revenues and a solid customer base, with the aim of achieving growth through new efficiencies.
The unfolding drama over Yahoo’s resistance to Microsoft’s unsolicited bid looms as an epic chapter in Silicon Valley’s evolution.
“From our perspective, Microsoft’s bid for Yahoo is very uncharacteristic,” Daly said. Microsoft Chief Executive Steve Ballmer, he said, “took a page from Larry Ellison’s playbook” by trying to grow through consolidation. For months BEA Systems had refused Oracle’s unsolicited bid before reaching agreement on an $8.5 billion price.
The proposed Microsoft-Yahoo mega-deal factors into Microsoft’s growing rivalry with Google in the online media and advertising business. In April 2007, Google agreed to buy DoubleClick for $3.1 billion, and Microsoft later countered by acquiring DoubleClick rival aQuantive for $6 billion. Microsoft is banking on Yahoo to further build its online presence and grow its ad revenue.
Contact Scott Duke Harris at sdharris@mercurynews.com or (408) 920-2704.
