Recently I presented a list of buyers to a client in Los Angeles. We put 25 companies on the white board, all of them over a billion in revenue. All had one thing in common: single-digit growth. Our list featured Autodesk, a company that not only stopped growing, but stopped intending to grow. Their CEO came out last December with an announcement that Autodesk is no longer a growth company - they want to be measured on profit margin. Others, such as Microsoft and Apple, are issuing escalating dividends, which is a sign that they don’t have a growth plan that will consume the cash they are generating.
Point One: Buyers aren’t growing organically. They desperately need inorganic growth through M&A.
Then I presented at a startup conference in Seattle. Of the 50 companies in the room, roughly a quarter had been approached with M&A proposals. Some of this dialog happened before they even launched a product.
Yahoo, Facebook, Google, Microsoft, Linkedin and others are going after startups. The job market is so competitive, they can’t hire people. Especially mobile developers. The skilled mobile teams are doing startups. The only way the big guys can hire is through acquisition.
Point Two: Skilled Developers are in high demand. Buyers will acquire companies just to get them.
For as long as I have followed the M&A markets, M&A volumes and valuations have moved in lockstep with the public markets. For the last two years, they haven’t. The markets have recovered, but M&A was down in 2012, and slower than everyone expected in the first half of this year. However, we will close 6 deals in the fourth quarter, and our friends in the industry are seeing similar trends. Meanwhile the number of inbound calls from potential clients who have been approached has gone up dramatically, and buyers are calling us, looking for deals.
Point Three: Buyers are stepping up their game and doing more deals.
Companies get acquired when buyers have no choice. M&A is risky and expensive. Buyers pay a premium only when they are at risk of losing deals. They can lose deals to other buyers. They can also lose deals to IPOs. But for the last few years, a seller who told a buyer to act now or else they would go public, would not have been credible. Not any longer. We sold Planswift to Textura late last year. Textura subsequently went public and now trades at 30x revenue.
Point Four: A resurgent IPO market forces buyers to buy, and gives buyers the capital to make acquisitions.
Crowdfunding is a hot topic. Alina and Elon walked us through the implications of the Jobs Act. Companies can now raise capital more cheaply, from a broader base of investors, and can sometimes do it without dilution, a la Kickstarter. Meanwhile we are seeing a surge in organized angel activity, as angels pick up the slack left by VCs.
Point Five: Cheaper, more available funding will create new competitive threats faster, forcing the large, incumbent companies to buy the little guys earlier, and for higher prices.