Symantec, McAfee Eyeing Start-Ups?

The first quarter of 2009 was remarkably, if predictably, quiet where mergers and acquisitions in the tech sector were concerned. While it’s still too early to tell if the current run-up in stocks will unfreeze the M&A market, the first sector to see renewed activity may well be in IT security software.

Traditionally active acquirers like Symantec and McAfee could be tempted to get back into the market as the liquidity crunch puts the squeeze on solid start-ups with great technology but not enough funds to bring their products to market. Brenon Daly, who tracks M&A activity for the 451Group, notes that many start-ups can’t generate revenue because they haven’t established inside sales and distribution channels. And they may not be able to go to their venture backers for the $20 million or so they might need to market their product. “No matter how slick the technology, it isn’t a viable business if no one is buying the products,” he told me.

The recent Conficker security scare can only make cutting edge info-tech security software more attractive to established vendors and their paying customers. Start-ups in the Internet security field have developed “amazing technology,” Daly said, while the established security software vendors are well-funded and have well-oiled sales channels.

Otherwise, the outlook for 2009 is fairly bleak. During the first quarter of 2009, there were 625 deals in the technology and telecom sector worldwide, worth a cumulative $8.1 billion. That’s a decline of 85% in dollar terms compared to Q1 of last year. Daly’s report, released Monday, noted:

Annualized, first-quarter M&A spending puts 2009 on track for the lowest level of tech dealmaking in more than a decade. In fact, the annualized total of some $32bn would be just half the recent low-water mark, the $61bn recorded in 2003… 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. For the past four straight years, spending on tech deals has topped $300bn.

One of the problems dragging down the volume of deals is what Daly called “difficulty in bridging the valuation gap.” In other words, the NASDAQ has lost about 35% of its value over the past year, but with companies still clinging to their former, higher valuations, it’s hard for bidders and potential sellers to arrive at a number they can agree upon. It’s worth noting that Sun was trading at just over $15 per share at the end of last April, and closed today at $6.28. It’s no wonder the Sun board choked on IBM’s offer of $9.40 — and understandable also that IBM wouldn’t want to go much higher.

Some shareholders, on the other hand, might be willing to take the money and run. “There’s a certain weariness in the shareholder base,” Daly said.

Image courtesy of the451Group.