As the Economy Turns, Tech M&A Is Back — and That's Good News for Startups

iStock_000003690791SmallLooks like the economy, and with it the urge to splurge, is back — especially in Silicon Valley. After a long chill, the M&A market seems to be thawing — welcome news for entrepreneurs and their backers, who have been stymied by the lack of exits and a moribund IPO market. And the recently announced deals are surfacing some interesting trends. But before we examine them, let’s just review some of the tie-ups that have been announced:

What do these deals have in common? None of them involve the usual suspects. Typically, Yahoo, Google, Microsoft and Cisco Systems are big buyers, but this time we’re seeing a whole new crop of companies looking to make acquisitions. They’re buying to:

  • Extend their current products into new markets. (VMware-Springsource)
  • Find new markets (Adobe-Omniture)
  • Ramp up their web presence. (Intuit-Mint)

What’s even more encouraging is that none of these deals are the small microtransactions that Silicon Valley got used to over the past few years, but are significant. I expect to see more of them. To buffer their businesses, I expect large companies — data center operators and networking hardware makers, in particular — to get acquisitive.

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The fact is that despite the slow comeback of the market, small technology companies are still a bargain. J.P. Morgan Research shows that small-cap stocks have declined 23 percent so far this year while large caps have increased by 3 percent. Large companies have been cutting their R&D budgets in order to get their fiscal houses in order. And they have also built up large stashes of cash. In other words, they have both the needs and the means to buy, J.P. Morgan says.

Although it seems that the technology market has been a mainstay in M&A activity, we have recently seen it all but dry up. In 2008, we note that only 45 deals were completed vs. in 2007 where we saw 94 deals completed in the internet space. However, we think acquisition multiples are much more attractive than in 2007. (“The State of the M&A Market” report by J.P. Morgan.)

Here is what J.P. Morgan thinks (and I agree) makes a good likely/potential acquisition:

  • Must-have brand (Mint)
  • Must-have product leadership (Omniture)
  • Easy to integrate (SpringSource)
  • Barriers to entry. (Omniture)

J.P. Morgan has come up with a list of possible takeout candidates, with Omniture at the top of the charts, followed by Latin American auction giant MercadoLibre. (Good call, guys.) The complete list is at the end of the post.

So what about the smaller, more web-centric startups? On that front, there is good news in the making.

  1. Brad Garlinghouse, a president with AOL, told me that he’s interested in shopping for startups that will help bulk up AOL’s communications business.
  2. In June, Google CEO Eric Schmidt told FOX Business News that he’s looking to buy technology-based companies where it’s easier to buy than build.

So now for the fun part: Who’s going to buy whom? These are my top 10 picks. Of course, you can play along by suggesting your picks in the comments. I’m not going to get into reasons — at least for now.

  1. Cisco Systems buys Sonos, the music player maker.
  2. Cisco buys some cloud computing startup such as RightScale.
  3. SugarCRM is going to be fancied by everyone from IBM to Red Hat.
  4. RIM buys Slacker.
  5. Perennial favorite: Dell buys Palm.
  6. Network Appliance, Extreme Networks and Force 10 Networks are likely buyout candidates.
  7. Microsoft buys Twitter ;-) (OK Now I’m just being mean!)
  8. Nokia buys Spotify.
  9. Electronic Arts buys ngmoco.
  10. Broadcom buys Atheros.

My outliers/unlikely deals:

  • eBay buys Etsy.
  • Cisco or RedHat buys Box.net
  • EMC and IBM become big buyers over next 12-18 months to bolster their cloud computing efforts.
  • Yahoo buys Facebook. (Not that it could happen.)
  • Yahoo buys Hulu. It really should :-)

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