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Withering M&A?

Just in case you needed more reinforcement of my point from yesterday…

"…the emphasis is on results and driving hard to self-sufficiency. In other words, spend each dollar like it's your last and place all your attention on getting to break even. "

This month has been marked with a heavy ration of venture capital "doom and gloom"… It's hard to miss between the NVCA press release announcing

"…for the first time since 1978, there were no venture-backed IPOs in the second quarter of 2008…"

or…

"VC's a glum bunch over economy, lack of exits."

Indeed, the NVCA press release shows not only a drought of IPOs but a substantial drop in the number of M&A events as well. If the second half of 2008 is anything like the first, we're on track for the worst M&A year since 1999 as far as I can tell.

The cause of the drop-off in M&A activity can be partially laid on the economy – public companies don't acquire when…

  • They are really concerned about their own expenses and profit – in this kind of market the target company better be break even or profitable otherwise the acquirer's own earnings are going to be negatively impacted and their stock will get hit.
  • They believe their own stock is seriously undervalued.

But I think there is another root cause that needs to be considered…

Take a look at the number of M&A deals in each year compared with the number of deals where the M&A VALUE WAS DISCLOSED:

I took the numbers from the different reports linked above and then annualized the 2008 number as an estimate for the total year. The percentage of deals with disclosed values has dropped to 35% based on the first half of 2008 after running at a rough average of 50% over the rest of the data. I believe that in general, M&A values get disclosed unless either the buyer or the seller have a reason to want to keep the number private – generally because either the buyer paid too much (not likely here!) or the seller was embarrassed at the price paid (usually where paid in capital is >> than the exit value!).

The precipitous drop in disclosed values suggests a significant number of the M&A events this year were less than happy results.

Like any other sale, M&A only occurs when a buyer and seller agree on the same price - so I think there are a couple of other points to consider when thinking about the current decline in M&A events:

  • M&A events don't take place when the seller is very unhappy with the sale price and they either have more capital to invest in the company or the company is self-sufficient (enough cash in the bank to give a long runway or breakeven/profitable).
  • The would-be seller believes their company is undervalued and a better exit can be achieved with more time.

To me this just places even more of a premium on results and execution. Be in control of your own destiny or life will be unhappy.

Food for thought and the last flogging of this point for a while…

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STU PHILLIPS
MENLO PARK, CALIFORNIA

Intense Brit, lived in Silicon Valley since 1984. Avid pilot, like digital photography, ham radio and a bunch of other stuff. Official Geek.

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