Monday, October 11, 2004

Post-bubble startups

By the end of September, there will have been more than 5,300 tech acquisitions in 2004, based on research from Mergerstat. The average reported selling price was $12 million; in two-thirds of the transactions, the prices were so small that buyers didn't disclose them. At this point in 2003, also a big year for small deals, there had been 4,500 tech acquisitions, averaging $12.5 million. Microsoft alone has bought 46 companies in the past four years; factor out the $100 million-plus deals, and most of Microsoft's acquisitions average a few million dollars. Oracle (ORCL) has been buying up small companies at the rate of about one per quarter, even as it pursues its $7.7 billion bid for PeopleSoft. Google (GOOG) has bought six small companies in the past 18 months. Hewlett-Packard (HPQ), IBM (IBM), Intel (INTC), Symantec (SYMC), Germany's SAP -- indeed, all of tech's power elite -- have made stepped-up acquisitions of small fry an integral part of their strategies.

What's behind the spree? It's driven by powerful postboom dynamics in the tech industry. For starters, Google's recent public offering notwithstanding, the IPO market remains largely moribund and isn't likely to be an express elevator to glory for entrepreneurs and investors anytime soon. That means that a buyout by a larger company is now the surest route to a sizable payday -- and a steady job -- for entrepreneurs. Another factor: Commoditization has made the cost of many basic technology components, from superfast chips to heavy-duty storage systems, so cheap that it's easier than ever for a bare-bones operation to build new products. The emergence of Linux and standard programming languages like Java also has made it easier to write software that can be easily woven into existing applications.

More important, however, are the evolving positions of larger companies. In many cases they have emerged from the tech collapse more dominant than ever. The firestorm of the bust cleared out weaker competitors and underscored to technology buyers the virtue of teaming up with established players that can take the heat of tough times. Today it's harder than ever for upstart companies to crack some of the most lucrative tech markets. Equally important, large companies increasingly recognize that, with stock options no longer the lure they once were, the most cost-effective way to bring in new talent and to fund R&D is simply to buy up innovators and their ideas. "Big companies stink at innovation, and they know it," says Vivek Mehra, general partner at venture fund August Capital in Menlo Park, Calif. "There are a lot of chances for startups to fill the niches and holes in big companies' product lines.",17863,696229-2,00.html