VC Deals Up, Values Down

Electronic News, August 27, 2001 by Heidi Elliott

The good news: venture capital-funded mergers rose in the second quarter. The bad news: the value of those transactions deteriorated.

Figures tabulated by Venture Economics and the National Venture Capital Association (NVCA) indicate the number of venture capital-backed mergers and acquisitions (M&A) rose sequentially in the second quarter to 76 deals, with a total value of $2 billion (some acquisitions had undisclosed values). While the number of deals rose by 13 sequentially, the value of second-quarter transactions declined to $61.3 million, down from first-quarter deals valued at $218 million. The decline is largely attributed to the decrease in high-tech company valuations.

Continuing a two-year trend, venture-backed M&A was concentrated in communications (nine deals for $811 million), Internet (34 deals for $413.7 million), software (15 deals for $72.8 million) and electronic components (4 deals for $534.8 million). These industries accounted for more than 75 percent of all the venture-back deals in the quarter.

Overall, the communications sector fared best in the second quarter with data communications companies closing three of the top five deals. IONA Technologies acquired Netfish Technologies Inc. for $269 million, Advanced Digital Information Corp. bought Pathlight Technology for $264 million and Micrel Semiconductor Inc. purchased Kendin Communications for $213 million.

The Internet-specific industry category represented the largest volume of venture-backed M&A activity. NVCA said this is not surprising as the merger and acquisition market is the only opportunity venture capitalists have to make a return on their prior investments. Internet deals totaled $413.7 million in the second quarter.

"Not a whole lot has changed ... venture capitalists are looking for the same things they always looked for. There's a return to the fundamentals of investing," said Jeanne Metzger, vice president of business development and public affairs at NVCA. Those things include strong management with a proven track record, a strong business plan and solid ideas. "The days of first-time entrepreneurs with strong ideas are over. They're not getting funded."

In the last three years of tracking, M&A activity peaked in the second quarter of 2000 when 86 deals were closed at a total value of almost $26 billion (of deals reporting value), averaging $454 million per transaction. Up until that point, all indicators moved in unison--deal volume, total values and average deal sizes all increased simultaneously. NVCA said since then, venture-backed M&A transactions have followed a jagged, erratic path as volume and value totals have either increased or decreased inversely proportional to each other.

"Ultimately, liquidity is crucial to private-equity investors. Robust M&A and IPO activity are paramount to successful performance in the venture capital industry. M&A activity this year appears to be taking up some of the slack left by the dearth of IPOs," said Jesse Reyes, Venture Economics' vice president, in a statement.

"With valuations of technologies continuing to fall from their precrash highs, there are more deals on the table at reasonable prices. But it is a two-edged sword: lower prices mean lower exit values and thus lower overall performance."

Other industries tracked included biotechnology with three deals valued at $51.7 million, communications and media with nine deals valued at $811.9 million, computer software and services with 15 deals valued at $72.8 million, and industrial/energy with two deals valued at $107 million.

Added Mark Heesen, president of the NVCA, "The increase in M&A activity this quarter underscores the importance of the EASE (Financial Accounting Standards Board) pooling issue, which was resolved to the satisfaction of the venture industry and financial community. The vitality of the M&A markets is critical to the venture capital industry."