M&A Makes a Comeback, Outpaces Hot IPO Market –

Advertising.com walked away from a $100 million IPO last year. No, its founders and backers aren’t crazy. They just got a better offer: $435 million in cash from America Online.

“We were set to go IPO with a healthy valuation, but AOL came in an exceeded it,” says Frank Adams, managing general partner of Grotech Capital Partners, one of Advertising.com’s venture backers. “Obviously, you go with the better deal.”

The deal returned more than six times the $70 million that Grotech, Blue Chip Venture Co., New Enterprise Associates and others had invested in the Baltimore-based provider of direct marketing services for Internet sites.

AOL’s purchase of Advertising.com highlighted the return of the M&A market after three so-so years.

Adams expects the market to be just as robust this year. Stacked up on the desk in his Timonium, Md.-based office are at least 30 “books” from various investment bankers, which are sending Grotech mostly unsolicited proposals from clients looking for a merger or acquisition. “We’re as busy as hell right now taking a look at M&A opportunities, and it’s only going to get hotter this year,” Adams says.

Last year, 333 venture-backed companies were acquired, compared to 291 in 2003 and the most since 350 were bought in 2001, according to figures released by Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association. Of the 333 VC-backed companies that were acquired, 181 companies disclosed deal terms, which showed a total value of $15.1 billion. That figure accounted for nearly 60% percent of the total dollars returned to venture investors last year. In comparison, 90 VC-backed companies launched an IPO in 2004, raising $11 billion, although the IPO total is partially skewed by the $1.6 billion IPO of Google and the $1.8 billion IPO of Semiconductor Manufacturing International Corp.

Will the good times last? The answer is probably “yes,” says Steven Bernard, director of M&A market analysis for the Chicago-based investment bank Baird, which last year tracked more than 9,000 acquisitions of mostly non-venture backed companies. Bernard says that the healthy M&A market is attributable to corporate buyers. He notes that public companies, which make up about 90% of M&A activity, were largely absent in previous years, but they came back last year.

Instant R&D

Thomas Penn, general partner of Radnor, Penn.-based Meridian Venture Partners, calls it a marriage made in heaven. Public companies, he notes, tend to have below average R&D budgets, while VC-backed startups are doing most of the vital research. As the startups mature, they usually get bought out. However, while none of that is unusual, last year proved to be a great year for VCs to sell their portfolio companies, Penn says. Biotech and life science companies had a good year on the IPO market last year, but M&A is where the action is now, Penn says.

Meridian was able to cash out of Implex Corp., a maker of knee and hip joint replacements, last year. Implex, which had about $30 million in backing from Meridian and other investors, was bought for $108 million by Zimmer Holdings (NYSE: ZMH), a supplier of medical equipment.

Penn expects to see more of Meridian’s portfolio companies get bought this year. “The orthopedic market is poised to have a good year in 2005,” he says. “It’s a great space to invest in and we expect M&A activity for it this year.”

Of the 11 industries that Baird tracks, seven industries saw double-digit growth of M&A activity in 2004. The busiest sector was health care, which saw a 20% jump in deals over 2003, Baird reports. Telecom had the largest rebound, with a 350% increase in deals from the year before.

“The economy is still good and CEOs are still confident,” Bernard says. “So without a change in those factors and without going out on a limb, I expect a continuation of more of the same in most industries in 2005.”

Similarly, Jay Beaghan, a partner at USBX, a Santa Monica, Calif.-based provider of investment banking services, says that stock currencies are well valued and the cost of capital is low. Beaghan expects most technology sectors to be ripe for the picking this year, and he says to be on the watch for a lot of consolidation in the software market in particular.

“It is currently among the most opportune times in recent history for technology companies to explore M&A and later-round growth financing,” Beaghan says.