Talk of more megadeals in the pipeline. So here’s a timely reminder that not all M+A plays in the technology sector are the same. Not all are Redux moments, either… 

Speculation and rumour are an integral part of the merger and acquisition merry-go-round, serving any number of purposes for all involved. Here’s a handy guide to three types of rumour against which any new speculation can be judged:
• rumours sometimes emerge from some ‘2+2=5’ guesswork by analysts or the media. These can be short-lived (especially in the summer, when there is less to write about), but they can also reflect what the industry is thinking but refuses to acknowledge in public;
• those on the acquisition trail often use selective leaks to pre-test the market’s reaction to their plans before being obliged by financial regulations to formally announce an interest. Share movements in the wake of such rumours are often a pretty good early indicator of the chance of a deal going ahead, although this can vary depending upon the degree of shareholder approval required for such deals to proceed.
• acquisition targets can also use selective leaks to indirectly announce that they are on the market, flushing out potential suitors while simultaneously talking up the price.

This recent crop of ICT rumours, in addition to the rather underwhelming attempt by Deutsche Telekom to acquire tele.ring (click here), featured Huawei, News Corp and Cisco among the predators and Marconi, Skype and Nokia among the prey. Despite the fact that rumours tend to be self-replicating and are often taken as a collective whole, each of these deals would be entirely different in character. In addition, each sends out its own ‘Redux Rating’ and the not-quite inverse ‘Dot.com Danger’ signals.

Rescue act
The suggestion that Huawei of China will buy Marconi, the troubled UK equipment manufacturer, is the most straightforward of the three. Marconi shares lifted more than 10% this morning on the news, after the speculation was met with a Marconi statement that the company “is continuing to pursue all strategic options with the objective of maximising shareholder value. These options include, amongst a range of alternatives, discussions with third parties about potential business combinations. The discussions are at a preliminary stage and there can be no assurance that an offer will ultimately take place.”

Marconi is still trying to rebuild from the shock of losing out on the last round of BT’s 21CN infrastructure contracts (click here) and has a long standing relationship with Huawei (click here). The fast-growing Chinese manufacturer could be expected to buy Marconi for around US$1bn, which would make sense in that Huawei was one of the winners in the 21CN contract awards. Marconi shareholders would doubtless welcome this exit route, although its doubtful that optimistic attempts to push the shares higher ahead of a deal will get them too far.

Redux Rating: 7/10: not a megadeal, but a logical move at a common-sense price.
Dot.com Danger: 1/10: Marconi is no dot.com; nor is Huawei, but it is backed by impressive growth and financial performance and can absorb the cost of acquisition (the opposite of a dot.com play, therefore).

Rabbit out of hat act
Stories that News Corp had been negotiating a US$3bn deal to buy Skype are altogether different in character. For a start, talks are said to have broken down last month. This suggests that either News Corp is seeing what the market thinks, or that the privately-owned Skype is letting the world know that is ‘in play’. Certainly, News Corp has been at pains to stress its Internet credentials of late, not least with last month’s US$580mn takeover of Intermix (click here).

There would have been more than a whiff of dot.com economics around any such deal. While Skype has had a dramatic impact on the VoIP world, the VoIP world has yet to have a dramatic impact on the telephony world. Nor is Skype invulnerable to being ‘Skyped’ itself as new and more powerful VoIP solutions emerge. This is not to underestimate the role of Skype in creating this new market; for this alone its founders, Niklas Zennström and Janus Friis, deserve to get rich. Watch this space: they soon will.

The real dot.com mummery on this story concerns News Corp. One’s ears go into ‘phantom bleeding’ mode just by imagining how such a deal would have been heralded chez Murdoch. The aural landscape would have been littered with references to convergence, as if a dynamic start-up would find its natural home in the suffocating embrace of a global media company. Go figure.

The rumour radar has now zeroed in on Skype, all the same. We even have a putative price at which the bidding can start. Naturally, every major telco in Europe and North America will be running the rule over the Luxembourg-based company, which is run from London. If Skype-hype is to be believed, these are the very companies most as risk from VoIP. The rumour may thus start a bidding war.

Redux Rating: 2/10: Dinosaurs with chequebooks circling a company they don’t understand; sellers seeking to exit before the market moves on. Telcos are still writing down past overpayments made in scenarios like these.
Dot.com Danger: 9/10: sky-high price for a new company with as-yet immature technology and untested business model. Sound familiar?

Air guitar act
A takeover of Marconi would be a mini-deal (c.US$1bn). A takeover of Skype would be a big deal (US$3bn and rising). If Cisco buys Nokia, this would be a mega-deal valued at upwards of US$70bn. By buying a company more than half its size, Cisco would be re-entering takeover territory on a scale not viewed in the technology sector since 2001.

From an industrial standpoint, the deal would make some sense, fusing the pair’s fixed and wireless infrastructure interests (although a full or partial demerger of Nokia’s handset business might follow). Like all true ‘mega-deals, this one would be shot through with machismo.

That means the rumour, still in ‘decline to comment’ status on both sides although sufficient to see Nokia’s shares open up 2% this morning, will have a me-too effect: every Cisco-clone and Nokia-peer will already be preparing some kind of response. While some will adopt the high-profile, low-cost (and therefore low-risk) strategy of snaffling up niche tiddlers in adjacent market segments, others would be driven to like-for-like ‘gesture’ acquisitions by any Cisco-Nokia deal.

It’s also be classified as ‘no smoke without fire’ speculation, which is what tends to happen when logical conjecture is made public. One hint here, though, is that last week’s changing of the guard at the helm of Nokia, with Olli-Pekka Kallasvuo set to take over from long-time chief Jorma Ollila, was accompanied by talk of strengthening the Finnish company’s performance in North America. Ah, the whiff of conspiracy.

In practical terms, whether the companies themselves could meld together and whether regulators (notably in Europe) would allow them to remains a major issue. The Finns might not exactly fall over themselves to see their industrial jewel fall into US hands. American investors might not welcome such a heavily-leveraged acquisition in the wake of the disasters still alive in recent memory.

A counter-intuitive tip would be that if everyone thinks it’s a bad idea it might well happen.

Redux Rating: 5/10: signalling spending power and confidence on Cisco’s part allied to a degree of industrial logic, but far-fetched in terms of shareholder approval.
Dot.com Danger:  6/10: symptomatic of old-industry responses to dot.com stimuli last time around; unable to respond to economic improvement through organic growth alone, acquisition is seen as an alternative route, despite the risks.

Bulls, bears, lemmings…
For all their flavours, M&A deals and the speculation which precedes them are herd animals which breed at an incredible rate. How they gestate, mutate and proliferate is a matter beyond mere speculation.

A tip for observers of these phenomena can be lifted from the 1951 sci-fi movie, ‘The Thing (From Another World)’. From the dialogue in its closing scene, while unexplained events are swirling around those at their mercy on a remote polar base, the simple instruction: “watch the skies…”
Jim Chalmers