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Originally published Sunday, February 28, 2010 at 10:00 PM

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Brier Dudley

Trawling for best deals

Don't be surprised if you see a few limos driving slowly down Elliott Avenue, doing a little window shopping.

Seattle Times staff columnist

Don't be surprised if you see a few limos driving slowly down Elliott Avenue, doing a little window shopping.

Big tech companies are expected to be on the prowl again for acquisitions this year, and the Elliott corridor along Seattle's waterfront is lined with prime targets.

Actually, companies around the region could be acquired in the coming year as bigger tech companies feel comfortable that the recovery has taken hold and begin spending the cash they've been accumulating.

"Now that the equity market is back up they're jumping in and catching up," said Nat Burgess, president of Corum Group, a Bothell firm that advises companies on mergers and acquisitions. "If you look out for the next six to nine months, it's going to be fantastic in terms of deal volumes, in terms of valuations."

Venture capitalist Matt McIlwain at Madrona Venture Group is expecting deals to roll over the next year or two.

The biggest tech companies, such as Microsoft, Cisco Systems and Google, did a remarkable job managing costs through the downturn and may now be realizing that they "underinvested in innovation," he said.

"To get growth and innovation, next-generation products, they're going to have to make some acquisitions," he said.

Interest rates are still low and the seven biggest tech companies together have $200 billion in cash and could generate $75 billion more this year, he said.

"That sets the stage for at least a 12-to-18-month cycle of acquisitions," McIlwain said.

Deals may be good for investors, but there's also a chance the acquiring companies will cut employees or even relocate the businesses.

Buyouts would also continue the Seattle syndrome that leaves the region with an uneven mix of tech companies — a few giants and lots of smaller ones, but not much in between. Companies with promising technologies tend to be sold before they get too big, creating a void in the middle.

But that won't stop the pinstriped buyers from cruising Elliott with trunks full of cash.

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The unusual cluster of tempting opportunities begins with F5, the crown jewel with a market valuation of $4.4 billion as of Friday.

F5 dominates the market for application delivery systems, creating what it calls "strategic points of control" in corporate networks. It's expecting sales of about $200 million this quarter.

Rumors about F5 being sold have come and gone for years. Some analysts said the big opportunity passed in November when likely buyer Hewlett-Packard bought 3Com instead.

One of those analysts is Jeff Evenson, a Bremerton native at Bernstein Research in New York.

Evenson said F5 would be a strategic fit with a number of companies, but he thinks it could be a challenge to get a deal done.

"The most obvious buyers have an issue that I think is almost insurmountable for them," he said.

Cisco would be a natural, he said, but it might have trouble getting antitrust approval for a deal if regulators focused on the niche F5 serves.

Within that segment of the network-switching market, the combination of F5 and Cisco would control 80 percent of the market.

But if regulators looked at the broader sector, it may not be as issue.

HP, Dell and even Oracle could be interested, but the stock's recent climb into the $55 range could cool their enthusiasm.

As expected, F5 wouldn't say much about the topic.

"F5 is a strategic point of control within people's data centers so I can understand why our name may surface in those discussions," said Dan Matte, senior vice president of marketing and business development.

"I can say that the management team at F5 is pleased with the achievements the company has made, and we intend to continue to be a vibrant part of the Seattle technology scene."

Casual-games giant

In the building right next to F5 is Big Fish Games, a quiet giant in the casual-games business that's been hugely profitable for most of its eight years in business.

Big Fish has about 400 employees creating and publishing games and running a Web portal that handles 1 million downloads a day.

Founder Paul Thelen has said he'd like to take the company public someday, but anything could happen.

Especially after Electronic Arts last fall paid $400 million to buy another piscine casual-game giant, London-based Playfish.

Jeremy Lewis, a Goldman Sachs veteran who became Big Fish's chief executive in 2007, declined to comment specifically, but said he's expecting more deals in the industry.

"As a practice we do not comment on rumors," he said via e-mail. "In general, we expect M&A activity within digital media and entertainment to continue."

Storage systems

A bit further south is the headquarters of Isilon Systems, the maker of storage systems used by movie studios, media companies, government agencies and others to add huge storage volumes to their networks.

Storage is a hot sector, Isilon has promising technology and it turned its first profit last quarter after working through a painful restructuring and Securities and Exchange Commission investigation.

The company, valued by the market at just under $500 million, seems like an easy target, but Chief Executive Sujal Patel told me last month the company is "very, very focused on growing our business into an independent, large storage company."

Isilon has been giving investors a similar message.

"These guys really believe there's a substantial long-term opportunity — everything they're trying to do is not focused on the near term," said Sid Parakh, an analyst at Seattle's McAdams Wright Ragen who watches both Isilon and F5.

"Isilon sees a big opportunity in front of them, so unless it's a substantial premium to where the stock is, I don't think that's a company that will be sold."

But you never know.

Buyers who really want to shop should keep heading south on Elliott.

A few blocks further they'll come to RealNetworks, which is practically holding a garage sale, putting its music subscription and games businesses into play.

Brier Dudley's column appears Mondays. Reach him at 206-515-5687 or bdudley@seattletimes.com.

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About Brier Dudley

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.
bdudley@seattletimes.com | 206-515-5687

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