Q2 M & A Update

Updata Advisors published their quarterly update on the tech M & A marketplace. Here are the highlights:

- 3 deals > $ 1B (vs. 1 deal in Q1)

- Fewer deals were completed in Q2 (427 compared with 448 in Q1)

- Outlook for tech M & A is positive, especially in software. Publicly traded tech companies are beating the major indexes in terms of share price increases. And when their shares go up, they feel rich. When they feel rich, they buy. More important than just share price – revenue and earnings are going up. So, these businesses are building strong operations and balance sheets needed to support M & A activity.

- Areas where we can expect to see more M & A activity: mobile, SaaS and cloud, financial technologies.

- From an M & A perspective, the current recession is worse than when the tech bubble burst. Glad to hear we are getting to the tail end of this.

- Venture capital investments in start-ups have also fallen to a level last seen more than a decade ago

- 8 tech IPOs in Q2 (vs. none in Q1)

While their report covers many sectors, here are some more details on the web / internet sector where I spend most of my time:

- Internet sector M&A activity remains modest but picked up in Q2 2009, with 17 pure-play deals, compared to 10 in Q1.

- Most transaction values were not disclosed suggesting smaller deal sizes

- Areas driving M & A: Improving online advertising, Microsoft & Google moving into each
other’s space, consumer e-commerce consolidation by eBay and Amazon, the evolution and maturing of social networking,collaboration

My Take

As Updata says in its conclusion, the second quarter of 2009 appears to be a step in the right direction for technology M&A and the economy as a whole. But, speaking from the perspective of VC-backed startups, we still have a big structural issue to deal with. As the table below (from a previous post) shows: we still have way more capital invested than exited. Thus, we have a whole cycle of companies that probably should not have been funded that will have to be harvested / killed off in some fashion. Similarly, we likely have a bunch of VC funds that need to exit the business too. Until this all stabilizes, I think we will see continued uncertainty in both the funding and exit market.