M&A: Signs of life

Signaling an improving economy, at least in the technology sector, M&A activity is on the rise. Fueling this burst of activity is the continued demand from many clients for one-stop shopping (software, hardware and services all under one roof), and the cash-rich position many tech giants are currently in.

The current wave of acquisitions started off with HP's acquisition of EDS back in May 2008, and picked up steam in late 2009 when Xerox bagged ACS, Dell acquired Perot Systems and, in January 2010, Oracle acquired Sun Microsystems. And this month, IBM announced that it will snatch up software company Sterling Commerce from AT&T, and SAP will purchase mobile software company Sybase.

This trend is likely to continue. IBM CEO Sam Palmisano said recently that IBM plans to spend $20 billion on acquisitions through 2015—an ambitious plan, since the firm hasn't spent that much money on acquisitions in the past 10 years. The amount of money spent on M&A has risen each quarter over the past year, though it's still not what it was in the heydays of 2006 and 2007; M&A deal volume in 2009 came out to $62.3 billion, over 60% below the volume witnessed in 2007.

But experts are no longer looking at those 2006/2007 numbers as realistic targets, since many of those acquisitions were funded by debt. Many of the largest acquisitions occurring these days don't aren't leveraged, since profits are up in the industry and the biggest tech players are rife with cash. Compared with 2006, technology companies in the S&P 500 had 36% more cash, as of their last reporting period, and they generated $137.6 billion in free cash flow over the last year.

With that excess cash, the biggest IT players continue to make themselves even bigger, broadening their service offerings to cater to a growing (and more demanding) pool of clients. The most attractive acquisition prospects now are those on the cutting edge of technology, such as mobile services and cloud computing. Of the S&P 500, HP was the most active buyer over the past three years, followed by Oracle, Xerox, Microsoft and IBM.