Even Silicon Valley Isn't Shopping

[qi:011] For many Web 2.0 start-ups, build-it-to-flip-it has been a mantra of sorts, with most hoping to get big payouts when Google, Yahoo or AOL cuts them a big check. Unfortunately, the credit crisis has turned those dreams into layaway plans. The 451 Group, a research firm, released an M&A report this morning that should give everyone a reality check.

Consider this year’s M&A activity at Cisco Systems (Nasdaq: CSCO), which has perennially ranked as one of Silicon Valley’s busiest shoppers. It has announced only four deals in 2008, just one-third the level of deals it has been averaging over the past three years. Cisco, which has the reputation of paying premium prices, inked 14 transactions last year, 10 in 2006 and 13 in 2005.

Similarly, after averaging a deal per month over the past two years, Google (Nasdaq: GOOG) has announced just four acquisitions in 2008. (The 55% decline so far this year of the formerly gravity-defying shares of the search engine may go some distance toward explaining its reluctance to shop.) And Dell virtually unplugged its acquisition machine, after only getting it going in mid-2007. It announced six deals in the second half of last year, but only one so far for all of 2008.

The report suggests things aren’t going to get any better for a while, and the bankers the researchers talked to said that the pipeline is dry. They expect 2009 to be the year when:

  • Divestures by large companies will increase but may not get any premiums.
  • Filing to go public isn’t going to get startups a premium.
  • The number of unsolicited deals will increase.
  • More venture-backed companies will try and buy out publicly traded competitors.
  • Valuations decline sharply.

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