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OVERVIEW

IT WAS ANOTHER RECORD YEAR for spending on technology mergers and acquisitions as both private equity firms and corporations dug into their deep pockets. The value of announced tech and telecom deals, excluding debt, increased 4.9% to $611.89 billion in 2006 even though the number of transactions declined 2.9% to 5,526, according to Dealogic.

The increase was most pronounced at the highest levels: The biggest deals got even larger. This inflation was driven largely by favorable credit markets and mounting cash holdings at companies. This allowed "many potential buyers to stay competitive in auctions that they perhaps wouldn't have contested in years past, driving up prices," says Brenon Daly, an analyst at research firm 451 Group.

For the second year in a row, AT&T was behind one of the biggest deals. After swallowing SBC in 2005, AT&T offered to pay $66.67 billion for BellSouth. Ma Bell is still awaiting regulatory approval, but sibling Lucent was sold for $13.44 billion to France's Alcatel. Buyout firms continued to hunt big tech targets in 2006. A year after SunGard agreed to an $11 billion buyout, Freescale Semiconductor reached a $17.6 billion deal with a Blackstone-led group. Meanwhile, corporate buyers remained active, with H-P buying Mercury Interactive and Google snapping up YouTube.   In this graphic, you can see some of the biggest tech deals of 2006 and what our panel of bankers and M&A advisers expects for 2007.

Research: Marcelo Prince

BIG DEALS

Here are some technology deals that made headlines in 2006.

*Excludes debt of target company Sources: Dealogic, WSJ Research

OUTLOOK

PANEL DIVIDED ON OUTLOOK FOR 2007

Our experts are divided on the outlook for tech deals. Some predict no letdown in the frenetic pace of dealmaking in 2007. They argue that flush buyout firms and cash-rich corporations will continue to seek out deals. But others caution a shrinking pool of attractive targets and rising prices could cool the tech M&A market.

Ken Marlin, managing partner of Marlin & Associates, a boutique M&A firm, expects the growth in tech M&A spending to moderate in 2007. Prices have risen, making some potential deals less attractive. "There is not an infinite number of good companies to get bought," he says. "We are seeing buyers become more and more picky." Potential targets that are not leading their niche or growing rapidly "may get left behind."

David Parker, managing director and head of the tech M&A group at Piper Jaffray, says "a lot of what was driving activity last year is still there," including maturing firms looking for growth and an abundance of capital. But "it's hard to imagine" tech M&A will be as strong next year as it was in 2006. One sector where he does expect a sharp pickup in activity is the Internet, given the dearth of big Web deals in 2006 and the strength of the online ad market.

Stephen Fraidin, an M&A lawyer and partner at Kirkland & Ellis, is concerned that the widening stock-options backdating scandal could affect the pace of tech dealmaking next year. "While it doesn't preclude M&A activity... it can inhibit it," he says. While options turmoil could make some firms vulnerable, he cautions that buyers may opt to walk away if accounting irregularities surface in the midst of merger negotiations.

Greg Peterson, a partner in Pricewaterhouse-Coopers' transaction-services practice, says tech and telecom dealmaking will continue to be driven by customer preferences. Businesses want to deal with fewer vendors and "the consumer now wants a single wire coming into their home with everything," he says. He expects more telecom and software consolidation. While deal multiples have "crept up, it is not as crazy as it was in 2000."

Paul Deninger, chairman of tech investment bank Jefferies Broadview, says private equity firms, which he estimates accounted for 26% of all tech deals over $500 million in 2006, will continue to drive M&A. "This trend is not abating," he says. "There appears to be no end in sight to the capital available" for leveraged buyouts. Meanwhile, CEOs want relief from "the onerous conditions under which public companies must now be run."

http://online.wsj.com/page/2_1267.html?

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Marlin & Associates

Founded in 2002, Marlin & Associates is a boutique investment banking and strategic consulting firm focused on providing highly strategic and specialized, transaction-related services to U.S. and international middle-market firms engaged in technology, information, on-line media and business-services. The firm is based in New York City with a Washington, DC office.