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When tech company mergers make sense

www.breakingviews.com

Mergers among technology companies rightly have a mixed reputation. Many of the companies are relatively light on assets, as patents, research, and especially people make up most of their value. Indeed, merging two technology companies has be compared to smashing together two investment banks. Imposing one culture, or cutting costs, can lead to the best employees walking out the door.

But some tech areas offer better prospects. The best appears to be telecoms equipment makers. Pushing two of these groups together can actually result in savings – the easiest way in which a merger can create value. Sales forces can be slashed, as the equipment makers tend to share the same end users. Merged companies can prune duplicated research and development. And there is always the prospect of increased sales. For example, Cisco and Alcatel have histories of buying up small companies and using large sales forces to sell acquired technology successfully.

Furthermore, there's no doubt that the industry is fragmented, with a few large companies at the top and a large number of smaller ones on the bottom. Despite this, it has proved resistant to attempts at rationalization.

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