Eye on M&A

Strategic buys aim to survive crisis

The economic downturn has dominated financial news in recent weeks, and it has affected the volume of mergers and acquisitions throughout industry. The most noteworthy recent development in M&A is the crumbling of United Technologies Corp.'s $2.63 billion offer to acquire Diebold Inc.

"I wouldn't say that no deals are getting
done," said Douglas Webster, managing
director of Baltimore investment banking
firm Signal Hill Capital. "But the deals that
are getting done are taking significantly
longer, and M&A volume is definitely down."

They're down but not out. "What we're
seeing is more focused buying," said John
Toups, chairman of the board of GTSI Corp.

In the past few weeks, Boeing Co. cut
two deals designed to grow its logistics
command-and-control systems work, and a
software developer became the latest
accretion to Hewlett-Packard Co.'s virtualization
business.

"A level of caution in the marketplace
means companies are more interested in
buying existing business lines to build a sector
business as opposed to buying technologies
that they then have to try to build a
business around," Webster said.

That logic prevailed with the Boeing and
HP buys. With its October acquisition of St.
Louis-based Federated Software Group,
Boeing added engineering and software for
tracking and distributing military equipment
and personnel. In September, the Chicago-based
company acquired Tapestry Solutions
Inc., a San Diego-based developer of Defense
Department logistics planning staples: the
Joint Distribution Logistics Model and Battle
Command Support Sustainment System.

Both acquisitions join Boeing's Integrated
Defense Systems (IDS) unit, and both dovetail
with the company's September launch of
an IDS services division. Boeing estimates
that the defense and government services
market is worth about $400 billion in the
next 10 years.

HP's $360 million acquisition last month
of LeftHand Networks Inc., a storage-area
network software developer in Boulder, Colo.,
extends HP's virtualization business and
builds on a long-term strategy.

Already a major player in the thin-client
computing market, HP last year snapped up
competing Neoware Inc. Thin clients are the
machines of choice in virtualization schemes
that let organizations use a single server to
run different virtual desktops.

And in March, HP teamed with Fort
Lauderdale, Fla., virtualization software
developer Citrix Systems Inc. on an
enhanced version of Citrix XenServer for its
new HP ProLiant iVirtualization 64-bit server.

"When the market is [down] like this, buyers
much prefer a business that has positive
cash flow and a long operating history vs.
unproven or emerging technology," Webster
said.

About the Author

Sami Lais is a special contributor to Washington Technology.

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