Kleiner Expects Vibrant Mobile M&A Scene

Startups that make games and other applications for Apple devices are increasingly being wooed by companies looking to buy an instant foothold in the rapidly growing mobile market, said the manager of a fund that invests in smartphone app makers.

The mergers and acquisitions market in the mobile space will be active over the next several years, said Matt Murphy, who manages a $200 million iFund investing in iPhone and iPad tablet app makers for the storied Silicon Valley firm Kleiner Perkins Caufield & Byers.

“A number of our companies have gotten acquisition offers in the last six months and I assume that will continue to go on,” he told Reuters in an interview last month.

“Incumbents are realizing that mobile is the next megatrend for the next 10, 20, 100 years. And if you don’t have a leading mobile product… you better get into the game because in a year or two year from now, it’s going to be too late.”

The well-known iFund has invested in popular app companies such as game designer ngmoco, social news aggregator Flipboard, texting provider Pinger, and music discovery service Shazam.

Ngmoco, one of its early investments, was acquired by Japanese company DeNa for $403 million last October. Kleiner Perkins made about $100 million from that sale.

Despite that rich payday, Kleiner Perkins and the companies themselves are less than eager to accept acquisition offers, given that Apple’s platform is now reaching over 100 million consumers through its three blockbuster devices.

“In a number of those cases we have decided to pass on the acquisition opportunity,” he said.

Murphy said it may be too early to sell as the companies are now able to generate revenue faster because of Apple’s massive — and growing — reach.

“When ngmoco first launched, it took like 18 months to get to $1 million-a-month kind of revenue,” he said. “We have seen a couple of our companies recently do that in as short as six months.”

The growth rate and popularity of some of these companies are being noticed by deep-pocketed companies that want to be bigger players in the mobile market.

M&A activity in mobile has so far largely been concentrated in the gaming sector, with companies like Walt Disney seeking to shore up their gaming credentials.

Disney bought social gaming company Playdom for $563 million last July, while Electronic Arts snapped up Chillingo, publisher of “Angry Birds” among other mobile games.

Meanwhile, some of the larger app makers are also on the hunt. Zynga Game Network, maker of the FarmBille game on Facebook and an iFund-backed company, has expanded rapidly through small acquisitions at the rate of about one a month in the past year.

The acquisition activity is also being sparked by the fact that iFund portfolio companies are facing tougher competition these days, with more than 500,000 different apps available for the iPhone, iPad and iPod touch through Apple’s App Store.

“There is no question it’s got harder,” Murphy said. “There is a certain Darwinian aspect of being in a market where there are 500,000 apps.”

Apple is also facing fierce competition from Google in the mobile market, with sales of Android-based phones recently overtaking iPhones. Google has said that about 400,000 Android phones are activated daily.

DCM, another Silicon Valley venture firm, similarly launched a $100 million fund dubbed the A-Fund, that will focus on startups developing for the Android platform.

But Murphy doesn’t see Kleiner moving to create another fund for app makers.

“We certainly don’t have any plans for an Android fund,” Murphy said.

—Poornima Gupta, Reuters