Risk-Taking Makes a Come-Back in Technology

Tech: The Return of Risk-Taking
Suddenly, there are mergers and acquisitions, IPOs, and investors galore. Will the reenergized industry lead the U.S. out of the Great Recession?

By Spencer E. Ante

In the past few weeks, Jon A. Woodruff, who heads up technology mergers and acquisitions in Goldman Sachs (GS)’ San Francisco office, has seen the mood shift in Silicon Valley. Tech companies are stepping up their dealmaking after a quiet year. In a span of 21 days, Goldman has worked on three major deals—eBay (EBAY)’s sale of Skype, Adobe (ADBE)’s purchase of Omniture (OMTR), and Dell (DELL)’s acquisition of Perot Systems (PER). “People seem more willing to take out their checkbooks again for the right assets,” says Woodruff.

The surge in deal activity is a sign of broader change: Risk-taking is making a comeback in the tech industry. The first three weeks of September saw $19.3 billion in technology mergers and acquisitions, up from $2.5 billion in August and $11 billion last September, according to Thomson Financial. Meanwhile, more companies are filing for initial public offerings, including such closely watched startups as Watertown (Mass.) battery maker A123 Systems. Venture capital investments are perking up, too. The micro-blogging service Twitter has raised a round of funding that gives the nearly revenue-free startup a valuation of $1 billion, according to several reports.

All this activity is being driven by a central idea: The worst of the recession is over, and it’s time to prepare for better times. Economists and other experts say many corporations put off technology investments during the downturn and are likely to step up spending to generate the productivity gains vital to the bottom line. Mark M. Zandi, chief economist of Mark M. Zandi (MCO), predicts that tech spending in the U.S. will increase 4% in 2010 and 10% in 2011, after dropping 10% this year. “I think we are at a turning point for tech,” he says.

Read the rest of the BusinessWeek story here.

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Mint.com: A Vindication of the Super-Angel VCs

Check out this follow-up story to the feature I wrote on super-angels back in May.

Mint.com: Nurtured by Super-Angel VCs
Intuit is acquiring a startup conceived by a “25-year-old kid” and funded by First Round Capital, a new breed of high-risk, early-stage venture capitalists

By Spencer E. Ante

Intuit’s purchase of Mint.com was a big win for Mint CEO Aaron Patzer and the rest of the 38-person staff he assembled to run the personal finance Web site. Yet the $170 million acquisition also vindicated a new breed of early-stage investor that is betting aggressively on startups while big-name venture capital firms conserve capital and shy away from risk. These so-called super angels are trying to reinvigorate venture capital by taking it back to its roots, when firms were smaller, nimbler, and more adept at helping to build companies from the ground up.

Mint.com owes much of its success to one such investor, First Round Capital, which opted to back the fledgling company at a time when other VCs demurred. Indeed, the Mint.com acquisition is First Round Capital’s largest exit, beating out the $100 million sale of portfolio company Powerset to Microsoft (MSFT). And although First Round Capital would not quantify the return on its investment, co-founder Josh Kopelman says the Mint.com deal generated the highest return of any deal the firm has done. Previously its best return came when eBay (EBAY) acquired StumbleUpon for $75 million, which generated more than 14 times First Round Capital’s original investment. “I don’t think this changes our strategy,” Kopelman says. “It is continued validation for our approach.”

Read the rest of my BusinessWeek story here.

IBM, eBay, Google: Tech Earnings Season Preview (Plus the iPhone App Store)

In this week’s broadcast of the Digital Dish, the BW tech team talks about Microsoft’s support for Carl Icahn’s moves to oust the board at Yahoo and revive takeover talks. Plus, the upcoming earnings season, and of course, the iPhone.

Check out the video here.

The Tech Earnings Safe Zone: Google, IBM, Intel and ???

Surprise! BusinessWeek reporters Spencer Ante, Heather Green, Arik Hesseldahl and Catherine Holahan dissect the big earnings reports from Google, IBM, Intel, Nokia and eBay. Watch the Digital Dish gang explain the washout that wasn’t.

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Tech CEO Survivor

This week, eBay CEO Meg Whitman announced she was stepping down after a ten-year run. That got me thinking about what other tech leaders may be headed for the exits in 2008. Check out this video in which BusinessWeek reporters Stephen Baker, Heather Green, Catherine Holahan and Spencer Ante play CEO survivor–and also talk about technology and the Presidential elections, and why the Internet is so annoying sometimes.

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Tech Dominated by M&A–not IPOs

A few days ago, I offered readers my forecast for tech IPOs in 2008. But in many ways, the real action–and most realistic exit strategy-for the lion’s share of startups is to be swallowed by some bigger fish. This point was driven home to me when I saw a recent end-of-year M&A report from America’s Growth Capital. Last year, there were 307 tech mergers or acquisitions, down 19% from 381 in 2006. That compared to 60 tech IPOs–a ratio of about 5 to 1.

The disparity in the importance of the IPO market and the M&A market really becomes clear, though, when you look at the value of the transactions. Last year, as of 12/19, there was $203 billion worth of tech M&A deals, compared to just $7 billion in capital raised through IPOs. That’s a ratio of 31 to 1!!!

Although the number of tech mergers declined, the value of those transactions soared 46%. The main reason? The explosion of huge private equity buy-outs. The number of tech deals exceeding $1 billion soared 38% last year. And four out of the top 10 largest deals were handled by private equity shops: Kohlberg Kravis Roberts acquired First Data, Silver Lake Partners bought Avaya, Madison Dearborn Partners scooped up CDW and The Blackstone Group took over Alliance Data Systems.

So what does this portend for 2008? With the private equity biz in a deep freeze, I would expect that we’ll see a significant decline in both the number of deals and the total value of transactions. That leaves good ol’ corporations as the main predators.

The prevailing business model, er, I mean, fantasy in Silicon Valley today is to be acquired by Google. But Google is not the most acquisitive tech company. Here’s the list of top 10 acquirers in 2007:

Microsoft (17)

Cisco (15)

Google (14)

Oracle (12)

EMC (12)

Hewlett Packard (11)

IBM (11)

Interactive Corps (9)

Yahoo! (6)

Nuance (4)

eBay (4)

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