Why Older Technology Companies May Attempt Desperate Deals

Beware of old tech seeking the fountain of youth.

Hardware makers including Cisco Systems, IBM and Hewlett-Packard – with a combined two centuries of life among them – are increasingly falling prey to natural selection in Silicon Valley. They’re devouring smaller, newer firms to keep pace, but weaknesses are getting harder to hide. That could lead to bigger, desperate deals for richly valued business software and big data companies.

The signs of carnage can’t be missed. In October, IBM reported falling sales for the sixth quarter in a row, led downward by its hardware businesses. For H.P., it is nine straight quarters of a shrinking top line. Cisco recently said revenue would decline until mid-2014. Even established software and web companies like Oracle and Google are suffering when it comes to sales of servers and smartphones.

The struggles are notable because financial statements reflect past innovation. Consistently falling sales are hard to reverse and often mean a company’s best days are behind it. BlackBerry is the latest case study. Its revenue actually kept growing even after it brushed off the introduction of the iPhone in 2007. Eventually, that changed – and swiftly.

Acquisitions, combined with cost-cutting, tend to be a popular way of trying to rejuvenate. It’s often a losing proposition, though. Control premiums and purchase accounting typically muddle matters. Tech takeovers also have a habit of failing. H.P. alone has written down about $18 billion worth of M.&A .since 2011.

That won’t necessarily be a deterrent, however. Data analyzers like Splunk and Tableau Software, and cloud purveyors such as Workday and NetSuite, are among those with much brighter prospects. NetSuite, at $7 billion, is the “cheapest” among them, trading at nearly 400 times estimated 2013 earnings. Splunk and Workday, with a combined market value of over $20 billion, each fetch more than 25 times estimated revenue. Slowing the aging process may prove irresistible to technology behemoths, but it would come at a hefty cost.

Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.