Increase in deal making in Silicon Valley
October 2009
Question… when Cisco Systems CEO John Chambers all but announces he’s going on a shopping spree, does his list include a smart-grid tech startup, consumer electronics — or both? And what might be next for Oracle’s Larry Ellison, assuming the $7.4 billion deal for Sun Microsystems gets finalized?
Mergers and acquisitions, also known as M&A, are back on the front burner in Silicon Valley. Corporate chieftains, venture capitalists, startup entrepreneurs and their attorneys have been busy cooking up deals large and small in an atmosphere that blends calculation, optimism and, in some cases, desperation.
The optimism arises from the renewed confidence in the economy. Deals such as Cisco‘s $3 billion acquisition last week of Tandberg, a videoconferencing innovator, and Adobe’s $1.8 billion acquisition two weeks ago of Omniture, a Web analytics firm, wouldn’t have happened amid the financial industry meltdown and the tumult on Wall Street, analysts say, because values were so hard to determine.
Giants such as Cisco, which has $35 billion cash on its balance sheet, and smaller public companies such as Intuit, with $1.4 billion in its wallet, have emerged from the crisis in a mood to buy. Leaders of such companies “are thinking, ‘What will drive growth? What will drive innovation?’ ” said venture capitalist Bruce Golden of Accel Partners.
“It’s an interesting time for the large-cap companies to acquire growth stories, talented teams and distinctive (intellectual property) and then leverage that through their giant distribution systems,” he added.
Mountain View-based Intuit aimed to do that this summer by paying $170 million each for valley startups PayCycle, an online payroll service, and Mint.com, an online system for managing personal finances, according to Intuit’s chief corporate strategy officer, Greig Coppe.
The Darwinian economy, Coppe noted, minimized competition for appealing companies and allowed more time for due diligence. “We have had a number of potential acquisitions go pretty far down the pipeline that we did not close, because something hasn’t proven out,” Coppe said. Intuit, he said, is actively scouting other possible deals.
September brought a sharp uptick in M&A activity, according to the 451 Group, a firm that analyzes the tech industry. The month began with the $2 billion “carve out” deal for Skype, in which eBay sold 65 percent of the company to a consortium led by the Menlo Park-based private equity group Silver Lake Partners, with participation by venture firms Andreessen Horowitz and Index Ventures.
Analyst Brenon Daly predicted that the September “acceleration” suggests that the climate is right for more deal-making in the months ahead.
David W. Healey, co-chairman of M&A for law firm Fenwick & West, said the recent deals have largely advanced strategic interests of the companies involved, “which is healthy,” as opposed to deals based more on “financial engineering” involving private equity and hedge funds that characterized much of the M&A earlier this decade.
Many small deals involve startups struggling for survival. Healey recalled the comment of an executive at a big valley company: “People are calling me and saying, ‘We’ve got a month’s worth of capital left. Will you buy me?’ ”
Such calls are often prompted by venture capitalists practicing portfolio triage. A venture capitalist nurturing five companies, Healey said, may decide to continue investments in only three “and tell the others, ‘Go sell yourself.’ ”
M&A has long been a vital aspect of the valley economy. For startups and venture capitalists, it is a primary means of turning equity and hard work into a lucrative payday. For corporate leaders, it can be a bold stroke of reinvention. Early this decade, high drama surrounded Hewlett-Packard’s acquisition of Compaq, a deal that helped turn HP into the world’s leading computer maker. More recently, Yahoo executives angered many stockholders by turning down a premium offer from Microsoft.
Oracle, known for growing through acquisitions, made headlines with its unsolicited but ultimately successful bids for PeopleSoft and BEA Systems. Oracle’s surprising decision to acquire beleaguered Sun Microsystems, now delayed in a review by European Union regulators, signaled Ellison’s willingness to branch out from the enterprise software business into hardware.
This summer, another drama ended happily for Data Domain stakeholders, after a bidding war between EMC and NetApp pushed its price for the Santa Clara-based data storage company from $1.8 billion to $2.4 billion. EMC prevailed, but NetApp also netted a $57 million breakup fee in the process.
Cisco Systems became the world’s dominant networking infrastructure company largely through more than 100 acquisitions. Chambers recently said Cisco plans to aggressively pursue more acquisitions in the coming year.
The Tandberg deal expands Cisco‘s reach in videoconferencing. Earlier this year, it branched into consumer electronics by paying $585 million for Pure Digital, maker of the Flip digital video cameras. Cisco‘s new “smart-grid” initiative to enhance efficiencies in the massive electricity-delivery industry, some analysts point out, put it on a collision course with startups such as Silver Springs Networks, which is already deploying technology to PG&E. Given Cisco‘s history, Silver Springs and its ilk may become acquisition targets.
Private companies such as Barracuda Networks, a firewall provider, have also looked for strategic fits. It has made four acquisitions since November 2008 — and has turned down many more offers from cash-starved and desperate startups.
“We’ve gotten so many distress cases pitched to us,” said Chief Financial Officer David Faugno.
