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Summary:

Bankers’ optimism about technology M&A is starting to wane, according to a newly issued report from tech research shop The 451 Group. The firm’s analysis calls for “slowing expansion” in 2008, due primarily to the credit crunch, which is having a dampening effect on the number […]

Bankers’ optimism about technology M&A is starting to wane, according to a newly issued report from tech research shop The 451 Group. The firm’s analysis calls for “slowing expansion” in 2008, due primarily to the credit crunch, which is having a dampening effect on the number of leveraged buyouts sought by private equity firms.

While two-thirds of bankers expect an expansion in their deal flow in 2008, a mere 13 percent (or four times as many as last year) are forecasting a decline in their business. And although corporate buyers still plan on picking up customers and new technology through acquisitions, with 45 percent expecting to increase their M&A activity, prices are likely to drop. For second-tier and me-too startups and their venture investors, that means the end of the Web 2.0 gravy train could be fast approaching.

Most of this will be driven by the tepid nature of the buyout markets, as private equity firms pull back on their deal-making. After hitting a high of $172 billion in deals in 2007, 37 percent of bankers expect their private equity deal flow to decrease. Bankers hate sloping trend lines — and few will tell you the truth in a slowing economy — which is why 45 percent say they think the amount of private equity will rise. But given that the number of buyout deals have dropped significantly in the last two quarters, I’m in the decline camp.

This should have multiple effects on tech startups. When the guys making billion-dollar deals sober up, prices tend to return to normal, and without speculation that buyouts await large technology firms, their stock prices may drop. The big guys can certainly handle it, despite their own business declines, but their M&A budgets will likely get toned down — soon they will pay a multiple based on sales or profits rather than one based solely on hype. Unless it’s Microsoft, who will pay a multiple of what Google would.

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  1. Who Cares If Corporate Valuations Are Crazy? – GigaOM Thursday, January 24, 2008

    [...] million valuation set by private equity funds notwithstanding, free-spending strategic buyers are showing signs of coming to their senses, so valuations may be coming [...]

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