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Exit strategy – It’s a great time to sell a tech business - M&A is hot
This is a very good time to sell your technology business - so good you might want to accelerate your exit strategy.
There is an interesting article in the April 7, 2008 issue of Business Week titled “Ravenous for Small Tech”. The article reports that while the change in value of mergers and acquisitions in 'all sectors' is down 51% in 2008, compared to last year, the value of 'high technology' M&A is actually up 132%.
In a May 2008 article in Mergers & Acquisitions, Tom Stein said: “2007 will be hailed as the biggest year for acquisitions of venture-backed technology since the dot.com days.”
Why is this happening now and how should this affect your exit strategy?
Big companies are using company acquisition to grow
The main reason the M&A market is so active is company acquisitions are now the best way for large companies to grow. This is summed up nicely in a quote from Vivek Mehra, general partner at the venture capital fund August Capital in Silicon Valley: "Big companies stink at innovation, and they know it."
Acquiring works so well that many big companies are now spending more on company acquisitions than R&D. Take Microsoft for example, according to Tom Stein: “Microsoft is seeking 20 companies, worth $50 million to $1 billion, and will spend more on acquisitions in fiscal 2008 than on R&D for the first time in its history.”
Cisco also prefers to “buy rather than build.” They have acquired 125 companies since 1993.
These big companies have large internal divisions completely devoted to buying companies.
It’s also a great time to sell a business because large companies are sitting on loads of cash. So much it’s actually a problem for company management because shareholders want them to either invest the capital to create growth or distribute it to the shareholders as dividends. Distributing cash is considered an admission of defeat for tech company management because it shows they don’t have any ideas on how to invest cash to increase shareholder value.
Big companies are also trying desperately to re-energize the entrepreneurial cultures that got them started in the first place. This is described well in a December 2005, Business 2.0 article: “The Flickrization of Yahoo!” The story describes how Bradley Horowitz, the head of Yahoo's developer network, decided to offer Flickr's founders $30 million for their startup. Horowitz invited Butterfield and Fake to Silicon Valley in late 2004. They had lunch in the Yahoo cafeteria and immediately hit it off. "I met Stewart and Caterina and fell in love," Horowitz recalls. "It was beyond Flickr. I saw them as kindred spirits, entrepreneurs who could infect Yahoo with that small-company focus.”
Examples of tech company sales
Last summer, a partner and I completed a very successful sale of one of our portfolio companies, Parasun. Working on that company sale left no doubt in my mind that the market is hot. The bidding was very active and we wound up selling the company for about 50% more than the founders and board had set as the exit strategy goal less than two years earlier.
Another great company sale example is the acquisition of Hostopia on June 19, 2008. This Toronto based web hosting company was trading around $5.00 per share just prior to the acquisition announcement at $10.55 per share – double what it was trading for. Some other examples of public company exits with 50% price increases are on this page.
This just might be the best time to sell your business
Nobody can predict the future. This may be near the peak of the tech M&A market, or it might be a trend that will last several more years. If you have been thinking about selling your business, now looks like a very good time.
