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Tech mergers on strongest pace since 2000 as big players pay up for growth

May 10, 2011 |  4:24 pm

Microskype
Microsoft Corp.’s agreement Tuesday to buy Internet telecom firm Skype for $8.5 billion is another sign of the prominence of big deals in this year's wave of merger activity, as megacompanies spend aggressively to buy growth.

The Microsoft-Skype deal lifted the total value of announced merger transactions in the tech sector worldwide to $85.5 billion since Jan. 1, making this the strongest start for any year since 2000 for tech transactions, according to Thomson Reuters data.

The year 2000, of course, marked the zenith of the tech-stock mania. Announced merger deals involving tech firms totaled a stunning $502 billion from Jan. 1 to May 10 of that year.

The ill-fated $164-billion purchase of Time Warner by AOL, announced in January 2000, was one of the bells sounding the end of that era, though many investors at the time refused to believe that the party was over.

This year’s $85.5 billion in tech deals pale compared with the merger rush in 2000. Still, the total is almost double the $43 billion in tech mergers announced in the same period of last year. . . .

Takeover activity this year in general is up sharply in dollar terms compared with last year. Across all industry sectors, the value of announced deals worldwide is $1.167 trillion, up 32% from $882 billion a year earlier, according to Dealogic.

But the number of transactions is down 5% from a year earlier, to 14,432.

In the U.S. alone, the number of transactions is down 15% this year, to 3,291, even though the dollar value is up 52% to $471 billion.

What the numbers indicate is that the average deal size is growing. That makes sense given that the world’s largest companies, including Microsoft, have the financial wherewithal to make big moves if they’re looking to buy other businesses as a way to boost long-term growth.

Many of the megacompanies have huge cash hoards, and even if they don’t they can easily borrow in the bond market, where investors remain hungry for corporate debt.

Last week semiconductor manufacturing equipment maker Applied Materials agreed to pay $4.3 billion for rival Varian Semiconductor Equipment Associates.

In April, Texas Instruments said it would pay $6.2 billion to buy National Semiconductor.

Whether these giant deals will pay off for the acquirers remains to be seen. But they’re paying off beautifully for shareholders of the target firms. Applied Materials agreed to shell out a 55% premium to Varian’s stock price; Texas Instruments paid a 78% premium to National Semi’s share price.

With those kinds of potential windfalls tantalizing investors it’s understandable that many have been reluctant to give up on stocks this year despite the risks posed by high oil prices, Japan’s earthquake, Europe’s ongoing debt crisis and other economic threats.

The tech-dominated Nasdaq composite index is up 8.3% year-to-date. The blue-chip Standard & Poor’s 500 index is up 7.9%.

-- Tom Petruno

Photo: Microsoft CEO Steve Ballmer shakes hands with Skype CEO Tony Bates during a news conference Tuesday. Credit: Justin Sullivan / Getty Images

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