Orange County technology companies are among the few to have cash reserves these days.
And they are holding on to that money.
Industry watchers say tech companies are more focused on staying afloat right now than making buyout plays.
“Companies are cautious about spending their cash because survivability is on a lot of their minds,” said Jim Feldhan, president of Phoenix-based Semico Research Corp., which tracks the chip industry. “There aren’t a lot of companies out there buying, even if they are cash-rich. At this point, they are being very selective and taking their time.”
The level of uncertainty in the economy has had a sort of paralyzing effect on deal-making, said Sean Walker, director at McGladrey Capital Markets LLC in Costa Mesa.
“Everyone is still trying to keep their heads about them in this market,” Walker said.
For some companies, that means making only prudent buys when the right target comes along. For others, it means keeping their hoards of cash close to the vest.
A slew of local tech companies were sitting on sizable stashes at the end of 2008.
Irvine’s Broadcom Corp. had roughly $1.2 billion, Lake Forest’s Western Digital Corp. had $1.4 billion, Santa Ana’s Ingram Micro Inc. had $763 million, Aliso Viejo’s QLogic Corp. had $372 million and Costa Mesa’s Emulex Corp. had $285 million.
“Cash is still king, especially in these times,” Walker said.
All-cash deals appeal to both buyers and sellers. They help a company avoid adding debt and don’t dilute shares like deals that use stock to fund an acquisition do. It’s also a benefit for a seller to not to be tied to another company’s financing.
Timing Acquisitions
Potential buyers may be waiting out the recession to ensure they’ll get the best price for an acquisition target.
“The general consensus is that people are not sure if we’ve hit a bottom yet,” Feldhan said.
Some think market valuations may continue to slide.
“You’ll find that even though they are sitting on cash, they still want to take advantage of depressed valuations,” Walker said. “Any buyer who wants to come in here doesn’t want to overpay for a business.”
Despite the uncertainty, tech companies still are open to good opportunities.
“There are a lot of good deals out there right now,” said Mike Ford, regional vice president at the Irvine office of RoseRyan. “Our clients say they are interested in acquiring companies and are actively looking for the best deal they can get.”
There’s a lot of talk about grabbing market share in the downturn and being able to come out of it in a stronger position.
Communications chipmaker Broadcom said late last year that it’s eyeing “weaker competitors if they are financially attractive.”
At an investor conference late last year Chief Executive Scott McGregor said he’s looking for deals with “companies that have talented people developing products that fit with (Broadcom’s) strategy.”
Some of last year’s deals involved companies plucking each other out of a crowded market, especially among chipmakers here.
The biggest chip deal was when Newport Beach contract chipmaker Jazz Semicon-ductor Inc. was swept up in February by Israel’s Tower Semiconductor Ltd. for about $170 million in stock and debt.
In August, Foothill Ranch-based Aristos Logic Corp., a maker of controller chips for storage networks, sold to Milpitas-based Adaptec Inc. for $41 million in cash.
Irvine’s Microsemi Corp., a maker of chips for military and industrial uses, bought rival Semicoa Semiconductors Inc. of Costa Mesa for $25 million in July.
The acquisition has been fingered by the Department of Justice for an investigation into whether the deal creates a monopoly on certain types of chips.
Technology Buys
Other local tech companies made what insiders call “strategic” buys to land a new market or get a specific technology.
“The acquisitions we expect to see will be companies focused on strengthening intellectual property portfolios and their long-term positions in the market,” Feldhan said. “Downturns are a time for opportunistic acquisitions.”
In October, Broadcom paid $142 million for a unit of Advanced Micro Devices Inc. that allowed it to expand its chip offerings into digital TV.
Quest Software Inc. made two such buys to grow its business software products.
In January, Quest bought Redwood City-based Monosphere Inc., a small maker of software that manages data storage networks, for undisclosed terms.
It bought Phoenix-based NetPro Comput-ing Inc. for $78 million in cash back in September.
Quest,typically a very acquisitive company,has slowed down its buying.
Last week the company’s board gave the green light to a stock buyback totaling up to $100 million.
The buyback, its second in six months, likely means that Quest would rather spend some of its roughly $260 million in cash propping up the company’s stock instead of making acquisitions.
In the case of Newport Beach-based Conexant Systems Inc., the chipmaker seems to be buying up product lines that will
generate a steady stream of revenue and selling off ones that are unprofitable or not growing.
In August, Conexant bought some of Freescale Semiconductor Inc.’s technologies for digital picture frames and a line of chips that go in printers that also fax, scan and copy for undisclosed terms.
Also in August the company sold off its business making chips for set-top TV boxes for up to $145 million to NXP Semiconduc-tors, the former chip arm of Royal Philips Electronics NV.
Industry watchers foresee a pickup in deals later this year.
“I think once it appears that we’ve bottomed out, you’ll see companies being acquired,” RoseRyan’s Ford said. “Com-panies are waiting for someone to make the first move. The companies that have the cash are waiting to jump on seeing a bit of positive economic news.”
