There is little downtime for Google’s acquisitions team.
The search giant’s M&A scouts started the year with the purchase of online reading startup EBook Technologies on Jan. 12. Less than two weeks later, the company announced the takeover of social voice startup SayNow.
March saw their attention turn to German analytics company Zynamics, and then British comparison shopping website BeatThatQuote, on the way to 15 acquisitions in the quarter, or more than one a week.
The pace of deal making proved faster than the aggressive one Google set last year, when it bought 48 companies, according to filings with the Securities and Exchange Commission.
There is little sign of a let up. April saw the $700 million purchase of flight information company ITA Software, which generated a tidy payday to backers
The Internet titan’s strategy isn’t hard to decipher. It hopes to reach deep into the startup ecosystem for new products, engineers and emerging technologies. And it isn’t the only tech Goliath working from the same playbook.
Corporate acquirers scooped up 109 venture-backed startups during the first quarter, a pace similar to the record setting deal making of 2010, when 431 companies were bought, according to the
In other words, Internet fever has come to M&A, and the turn of events could allow venture firms to begin profiting handsomely from the Web 2.0 investments they’ve made over the past half-decade. What’s more, many GPs expect a surge of merger activity in the second half of the year to produce even better results.
The change holds out hope for an industry suffering from sluggish returns and a difficult fundraising environment. VCs still achieve the majority of their portfolio exits from M&A, so a lucrative Internet sector could begin to turn both difficulties around.
“The LinkedIn IPO changed things. It’s the first super successful Internet IPO” since the dot-com bust.”
Bryan StolleGeneral PartnerMohr Davidow Ventures
Already Facebook, Zynga and Groupon have been active with M&A. Facebook, for example, purchased more than a dozen companies since its founding in 2004, including mobile app developer Snaptu, group messaging service Beluga, and data collections startup Daytum this year. Its annual deal making pace could rise to 15 companies by December.
Zynga is equally aggressive and has targeted 14 buys in the past 12 months, including social games maker DNA Games in May.
LinkedIn, the least active of the group, could see its policy change. The company says a handful of deals could take place this year on the heels of its January deal for business card scanner CardMunch.
This is likely to keep some of the hottest Internet markets sizzling well into the future as demand continues for startups addressing social media, social gaming, consumer ecommerce, mobile advertising, security, cloud infrastructure, online analytics, and apps for smart phones and the iPad.
Investors, such as Robert Ackerman, managing director of
By the time the year is over, “the M&A activity will be twice what it was last year,” as long as the economy doesn’t weaken too significantly, Ackerman says.
Siegel says Menlo’s portfolio has been scouted, as well, and four of the firm’s companies have been acquired so far this year. In one instance, Visa agreed to buy online payments company PlaySpan for $190 million, bringing Menlo about a 2.5x return, Siegel says. In a deal less Internet-related, memory maker Sandisk bought solid-state drive maker Pliant Technology for $327 million, with a 4x return to the firm.
Entrepreneurs say deal making is motivated as much by scale as high prices. One example is Reply’s merger with Mountain View, Calif.-based MerchantCircle.
The deal offered some liquidity to MerchantCircle backers
I have had M&A feelers on half of the portfolio.”
Robert AckermanManaging DirectorAllegis Capital
“I wanted to be at critical mass,” says Smith, now president of San Ramon, Calif.-based Reply’s media division. “I didn’t want to miss the opportunity.”
To prepare, the company will use its new size to make additional acquisitions. “I think the multiples will definitely climb,” Smith adds.
Smaller companies see mergers as welcome alternatives to competing alone. Some of these startups have seed financing and are now trying to decide whether to raise institutional money.
A lot of companies have been funded in the past several years and they will see a $10 million to $20 million sale as a good opportunity, says Bryan Stolle, a general partner at
One sign of this is the younger age of today’s acquisitions. The median time from first financing to transaction in the first quarter shrank to 4.5 years from 6.5 years in 2007, according to Siegel. He says it shows a willingness of young companies to consider M&A and of large public companies to buy interesting technologies with only minimal evidence of commercial success. Big corporations “are clearly willing to take more risk,” he says.
Perhaps the most difficult question facing dealmakers is price. In completing his MerchantCircle deal, Reply CEO and founder Payam Zamani says traffic, along with the synergies between the two companies and the quality of the MerchantCircle team, were key considerations to calculating value.
In other instances, more non-conventional metrics are being used, including attaching multiples to 2013 revenue projections, says Sumeet Jain, a principal at
“It certainly is aggressive,” but being a leader is valuable, Jain says.
Whether this valuation premium continues remains to be seen. At CapLinked, a networking site for entrepreneurs and investors that launched in October, CEO Eric Jackson acknowledges it is premature to think of being acquired. But with companies such as Facebook and Google on the prowl, “There is going to be some form of trickle down effect,” he says.
This could mean not just more acquisitions in the next 12 to 18 months, but some eye-catching prices.