A group of M&A and strategy chiefs from some of the biggest technology players recently described the economic environment for acquiring companies: Dealmaking isn't impossible, but then again, it ain't what it used to be.
Speaking at AlwaysOn's Venture Summit in Half Moon Bay, Calif., in early December, these executives said their respective companies would slow down their M&A pace. David Lawee, named Google Inc.'s vice president of corporate development in February, said the search giant buys an average of one company a month. The deals range in size from small startups to the company's biggest deal, the $3.1 billion acquisition earlier this year of online advertising firm DoubleClick Inc.
Acquisitions aren't necessarily cheaper now, but there's a dislocation between buyers' and sellers' expectations of what a company might be worth, which adds a challenge to dealmaking, Lawee said.
Google tends to look for two kinds of acquisitions. First, it searches for startups with "breakout technologies," such as Android Inc., which was quietly acquired last year and provided the basis for Google's mobile platform, or Keyhole Corp., the company's first purchase as a public company, which led to the Google Earth 3D mapping application.
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Then there are companies that "have reached escape velocity in
complementary markets," he said. YouTube Inc., which Google acquired
for $1.6 billion in 2006, is a prime example. "Usually, you have to pay
up" for top-grade companies, he said. "We are not really benefiting
from lower valuations."
Jeff Russakow, vice president of global strategies and solutions at Symantec Corp.,
said the security software company has struck five acquisitions this
year and generally sets aside half its annual free cash flow to spend
on acquisitions.
"It's a good market, but it's a different market," he said. "The
economic environment is not disincenting us at all to continue buying
strategic assets."
Several of the panelists said they are getting more calls from
companies that are running out of cash or are otherwise suffering from
the current economic woes. That instantly lowers the starting price in
the negotiation process.
"When a banker calls to make a quick sale, the price goes down," said Claudia Fan Munce, managing director of IBM Corp.'s venture capital group.
Yet just because buyouts could come much more cheaply now, companies like Microsoft Corp. aren't necessarily going to start buying more.
"The economic climate is not going to dissuade us," said Microsoft
corporate vice president Dan'l Lewin, who noted that the software giant
acquired 22 companies in the past 18 months. "But 'buy more and save'
isn't going to work."
Of all the participants, Brian Moriarty, vice president of corporate
affairs at Sun Microsystems Inc. had the dourest view of the new
challenges facing acquisitive technology corporations.
Well-funded companies with a solid business don't necessarily have
to sell now, which makes pricing discussions "much more difficult," he
said. The lack of clarity regarding where the economy or stock market
is headed is also playing a role.
"Generally, CEOs stop wanting to do acquisitions when they stop seeing the future very well," Moriarty said.
Lawee also expressed some concern about what effect startups' belt
tightening will have on innovation. If a young company is forced to cut
some projects to focus on what it expects to be its winners, it might
inadvertently kill what could potentially be its breakthrough product,
he said.
"In most companies, if you look back at their most successful
breakouts, it was from something unpredictable," Lawee said. "Google is
a great example of a company that zigged and zagged before it found its
success."
| Hard times |
| Although the number of technology and biotech industry deals has remained fairly stable in 2008, valuations are plunging. The total enterprise value of announced M&A transactions in these sectors through the third quarter was $89 billion, compared with $177 billion for all of 2007. Deal multiples also are falling to levels last seen following the last big tech bust. |
Year |
Tech and biotech median EV/revenue multiples |
1998 |
1.5x |
1999 |
2.0 |
2000 |
2.0 |
2001 |
1.3 |
2002 |
0.9 |
2003 |
1.4 |
2004 |
1.7 |
2005 |
1.8 |
2006 |
2.1 |
2007 |
2.4 |
2008* |
1.5 |
* Year-to-date through 10/31
Source: Updata Advisors |
