Report cites reasons why venture-backed M&As still continue to slide

January 14
11:59 PM 2014

Mergers and acquisitions for venture-backed companies still remain tepid despite the most recent purchase of Nest Labs by search giant Google, Russ Garland of WSJ Blog Digits reported. Last year may have been the best for venture-backed IPOs in six years but acquisitions have continued to decline. In 2013, there were 436 mergers and acquisitions of firms backed by venture capital which represented a fall of 11% from the year before, the report said.

This is the third year in a row when mergers and acquisitions activity dropped from a 2010 peak of 593 deals. Moreover, the amount that acquirers paid for their purchases also went down for the second year in a row. In 2012, the figure was pegged at $45.91 billion. However, it declined 16% last year to $38.55 billion, the report said.

The decline occurred even if acquirers that are listed publicly have a lot of cash in their war chest, there is doing well and a lot of them turn to startups instead of their own R&D team for innovation, the report said.

The $3.2 billion Google-Nest deal shows one reason for the decline: Companies backed by venture capital are expensive. The report said the average pre-money valuation for the first nine months last year for later-stage venture capital funding was the highest in 13 years.

Highland Capital Partners General Partner Sean Dalton told Garland that acquirers know this and are not willing to part with their cash to pay some of the prices asked by the venture-backed firms. He said, "The cash is there. There's a little bit of healthy skepticism, at least with the companies I know well."

A deeper issue is seen by Evercore Partners Senior Managing Director Paul Deninger, the report said. This is the bifurcation of the M&A market. The report added that a key reason for the lessening number of acquisitions is erosion happening in the ranks of technology companies because of consolidation and a reduced IPO market.

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