NEW YORK -(Dow Jones)- The outlook for technology industry merger-and- acquisition activity, already predicted to be big and busy, just got giant and crazy.

Microsoft Corp.'s (NASDAQ-NMS:MSFT) (MSFT) unsolicited $44.6 billion offer to buy Yahoo Inc. (NASDAQ-NMS:YHOO) ( YHOO), in a bold move to expand its Internet business and compete more effectively with Google Inc. (NASDAQ-NMS:GOOG) (GOOG), gives a swift kick to what was already expected to be a strong year for technology-industry deal making.

Last year was a record year for tech M&A in dollar terms, with $476 billion changing hands in 3,559 deals, according to Boston research firm the 451 Group. In 2006, there were more deals - 4,015 to be exact - but bigger price tags in 2007, including 80 deals worth more than $1 billion, helped push the dollar value over 2006's tally of $455 billion, the firm said.

Even more is expected this year, driven by strategic corporate buyers, such as Microsoft (NASDAQ-NMS:MSFT) , who are awash in cash and eager to secure better competitive positions. Companies across the industry are apt to continue to try to spend their way to stronger core businesses, exciting new markets, new technologies and new customers. Last year, tech companies announced 62 all-cash deals worth at least $1 billion and totaling $296 billion, twice the spending in 2006.

"Strategics are on the prowl," thanks to strong balance sheets and recent share-price declines for many targets, says 451 Group analyst Brenon Daly. " These tech companies throw off tons of cash....They're not concerned with what's going on in the credit markets."

Indeed, tech M&A is likely to rumble along despite the absence of key players in early 2007: private-equity firms. These actors have been largely knocked out by the credit crunch. They did $158 billion in deals in the first half of 2007, but only $14 billion in the second half, according to 451 Group.

"Private equity was taking a look at some very large deals," said Morton Pierce, chairman of Dewey & LeBoeuf's mergers-and-acquisitions group. Indeed, private-equity players were rumored to have been considering a buyout of Yahoo (NASDAQ-NMS:YHOO) . But with them out of the picture, Microsoft (NASDAQ-NMS:MSFT) seems to be sitting pretty.

"I don't think private equity in this environment will be a competitor. And I don't see a lot of companies out there who can afford something like this," Pierce said.

Perhaps, but Kevin L. Kemmerer, senior vice president at Safeguard Scientifics Inc. (NYSE:SFE) (SFE), a private-equity investor in technology and health-care companies, argues there will be a fair number of buyouts this year.

"There's no shortage of capital chasing technology companies," he said. Yet, in the current environment, he said, private-equity buyers will more likely pursue mature and stable companies over high-flyers, where cash-rich strategic buyers willing to pay up for growth can outbid them.

Despite private equity's troubles, bankers have been fairly bullish on deal- flow outlook for 2008. In a November survey of roughly 100 M&A professionals by 451 Group, more than half said their overall deal pipeline was at least 10% fuller than at the same time a year earlier. For 2008, 77% predicted a rise in the number of deals and 68% predicted a rise in the value of deals. Software, security and mobile technology were seen as key areas for more deals.

Pierce said Microsoft's (NASDAQ-NMS:MSFT) move to buy Yahoo (NASDAQ-NMS:YHOO) could spark more M&A activity in the Internet arena, where deal making has been fast and furious for several years.

"Any time a deal is done in any sector, that sector has to look around and say what is the effect on them," he said. Competitors, "looking at their own strategic position, have to take a look and see if they want to do something."

"When there's sort of a blockbuster deal, that tends to set some things in motion," agrees Cherie Smith Homa, managing director of KPMG Corporate Finance LLC's investment-banking practice. Potential future deals could involve ValueClick Inc. (NASDAQ-NMS:VCLK) (VCLK) and Infospace Inc. (NASDAQ-NMS:INSP) (INSP), she said. And there is speculation that New York Times Co. (NYSE:NYT) (NYT) might sell its About.com unit and that Time Warner Inc. (NYSE:TWX) (TWX) might sell AOL. However, Homa said she sees AOL as more likely to be a buyer than a seller, noting that few companies can buy a company as big as AOL.

Overall this year, the weakening economic environment isn't expected to put much of a damper on deal making. So far, most technology companies haven't been hurt unduly. And even if they were, economic distress can be a catalyst for deals, as stronger players move against weaker players in efforts to solidify leadership positions.

That said, continued declines for tech stocks could make completing deals tougher because of disagreements over price. Buyers tend to be timid about pulling the trigger when the value of a key currency for purchases - stock - is shifting, says Kemmerer. Meanwhile, sellers tend to resist the notion that they aren't worth as much money as they were until only recently.

In the Microsoft-Yahoo case, some analysts expect Yahoo (NASDAQ-NMS:YHOO) will push for a higher price, arguing valuation should be based on its stock price over a period of time. Yahoo (NASDAQ-NMS:YHOO) shares, which were at $19.18 before Friday, hit a high of $34.08 on Oct. 29, above Microsoft's (NASDAQ-NMS:MSFT) per-share offer of $31.

But M&A sources say valuations look like they will stay quite strong, whether for public or private companies, because buyer demand is strong and sellers still have lofty demands.

"Despite what's happening in the public market, I'm not seeing valuations coming down in our space," Kemmerer adds, referring to small but fast-growing private companies. "There's a lot of capital looking for deals."

-By Riva Richmond, Dow Jones Newswires; 201-938-5670; riva.richmond@ dowjones.com

    (END) Dow Jones Newswires   02-01-08 1733   Copyright (c) 2008 Dow Jones & Company, Inc.