M&A: The way forward for VC exits in 2010

General economic conditions have meant that M&A activity in the technology sector over the last 18 months or so has been relatively quiet. Even the likes of Microsoft, Google, Cisco, IBM and Intel, who each have significant cash reserves in excess of $20 billion and therefore do not generally rely on the credit markets to fund their acquisitions, have been comparatively inactive over this period of economic uncertainty. A comparison of M&A deals in 2008 and 2009, shows that the value of technology M&A transactions has dropped by 32%, whilst volumes have dropped by 23%.

This lack of M&A activity has created problems for mature VC funds which have reached the end of their life-cycle and are looking for divestment opportunities. With the IPO markets having been closed for a longer period, thereby compounding the problem, VC funds need to be alive to future M&A opportunities to provide the required exits and allow for the return of capital to their LPs.

Although there have been fewer exits for VC-backed companies over the last 18 months, there is a growing expectation that activity might pick up in 2010. Some of this activity will be led by the large technology players who may find themselves under increasing pressure to return money to shareholders in the form of special dividends if they do not spend their money on M&A opportunities.

The bigger technology players will be looking to vertical integration, such as Google's $750m acquisition of AdMob. This deal is similar to mobile advertising acquisitions that AOL, Microsoft, Yahoo, and Apple made over the past two years. SaaS, social networking and communication tools are also areas where M&A deals could be struck. In addition, the same potential acquirers are looking at innovations in the cleantech space, such as smart metering, smart grid and smart home technologies in a race to "control the home". But the confidence of the bigger technology players to make acquisitions will only come with an increase in consumer demand.

A resurrection of the IPO market would also see an increase in acquisitions as interested parties often look to make their move prior to any target company's IPO to minimise acquisition costs. Exactly when this resurrection in the IPO market will occur is still up for debate following a series of IPO cancellations due to the unfavourable market conditions. Of the 62 IPOs launched globally since 1 December 2009, 32 have been shelved, including private equity backed companies such as New Look and Travelport.

Yet there are glimpses of hope. Promethean World, the interactive whiteboard manufacturer backed by Apax, is looking to IPO with a £400-500m valuation and EMIS, the healthcare software supplier, has recently launched its £200m AIM IPO. In the US, VC-backed JinkoSolar, a developer of silicon wafers for solar panels, has filed to raise up to $100m. There are further IPO rumours for 2010. At the moment the planned IPO of Skype is still set for the first half of 2010, with other IPO contenders including Facebook, Twitter, Yelp and Demand Media.

With news this week of the $330m sale of VC-backed biotech, Apatech, and with the big technology players coming under pressure to make acquisitions, there is scope for optimism that M&A activity will continue to increase in 2010.

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