Q3 2010 Update - Digital Media

M&A is back in Style 

Deals in the Digital Media (Internet, Paid Content, Digital Marketing, Digital Media/Commerce, Gaming, Mobile/Internet Applications) sector for Q3 2010 slightly pulled back from Q2 2010, but were still quite active for the quarter. We tracked and noted just over 200 deals announced for Q3 2010. Valuations were up 41% from Q3 2009 where there were $10.9 billion total announced transactions for the quarter.

Q3 2010 ended with AOL announcing three acquisitions, including: TechCruch, Thing Labs and 5min on September 28.  Google continues to be very active having made eight acquisitions in search or social media and is rumored to have made a $100 million investment in leading social gamer, Zynga, during the 3Q 2010.  The most active sectors overall include social gaming, mobile technology and analytics. 

Mobile Technology was one of the most active sectors with 10 deals announced, including 4 acquisitions and 6 investments worth $108 million. Transactions included Motorola’s acquisition of 280 North for $20 million, Walt Disney’s purchase of Tapulous and WebTrends’ acquisition of Transpond. Among investments, PocketGear raised $15 million from Trident Capital, Shopkick raised $15 million from Kleiner, Perkins, Caufield & Byers and Ngmoco raised $5 million from Google Ventures.

Digital Media/eCommerce was the second most active segment. There were 53 deals announced for Q3 including 33 acquisitions and 20 investments valued at roughly $2.5 billion. Within that industry, e-commerce led the way with 19 transactions for $416 million.

In third place behind eCommerce in terms of activity was Social Media, with 13 transactions worth $231 million. Dividing the category further, there were 10 deals in the Social Games sub-segment for nearly $939 million.

Within the Digital Media/eCommerce sector, there was Hellman & Friedman’s purchase of Internet Brands for $640 million, Walt Disney’s acquisition of Playdom for $563 million, Google’s acquisitions of Slide for $228 million and Like.com for $100 million, and OpenTable’s acquisition of TopTable.com for $55 million. Among investments, Etsy raised $20 million from Index Venture Partners, BuyWithMe raised $16 million from Bain Capital Ventures, Hi5 Networks raised $14 million from Crosslink Capital, Beyond the Rack raised $12 million from Highland Capital Partner.

Despite the continued economic volatility, M&A deals are not slowing down. Volume will likely hold steady or continue to rise further as buyers’ and sellers’ expectations match up. We see 2011 becoming a healthy M&A market and forecast the number of deals announced and valuations will rise further.

IPO Market - Slow and Steady:

The number of venture-backed IPOs, however, dropped from 17 in the second quarter to 14 in the third quarter, with their total value easing from $1.27 billion in the second quarter to $1.25 billion by the end of September 2010. But the 14 IPOs in the third quarter 2010 well outpaced the 3 IPOs a year earlier — there were only 12 VC-backed IPOs in all of 2009. The $1.25 billion value of IPOs in the third quarter of 2010 also more than doubled the $572 million value of the three deals a year earlier.

More than half, 8 of the 14, IPOs involved information technology companies, with the remaining 6 divided between life science (4) and non-technology (2) companies.

Up and coming digital media IPOs include: Demand Media, Skype, Hulu, Nielsen, and Mail.ru Group (formally Digital Sky Technologies).       

The complete report can be downloaded (free) here: www.generationequityadvisors.com/files/GEA_Quarterly_Digital_Media_Update_Q3_2010_.pdf

Generation Equity Advisors, LLC

www.generationequityadvisors.com

Q3 2010 Update - Software & IT Services

Deal-Making is Back in Style

The number and value of U.S. disclosed venture capital exit deals in the third quarter of 2010 showed a mixed pattern compared to the second quarter of 2010, with more mergers and acquisitions (M&As) of VC-backed properties, but somewhat fewer initial public offerings (IPOs) of company stock.

Thomson Reuters and National Venture Capital Association compile and report these data collected by Dow-Jones VentureSource.

The third quarter of 2010 had 104 VC-backed M&A deals compared to 97 in the second quarter, and significantly more than the 69 deals in the third quarter of 2009. The 27 M&A deals that disclosed their value totaled more than $3.8 billion in the third quarter, 31% more than the previous quarter and well more than double the $1.4 billion total value of deals a year earlier.

Most (82 of the 104) M&A deals involved information technology companies, with the other 22 split between life science (14) and non-technology (8) companies.

The number of venture-backed IPOs, however, dropped from 17 in the second quarter to 14 in the third quarter, with their total value easing from $1.27 billion in the second quarter to $1.25 billion by the end of September 2010. But the 14 IPOs in the third quarter 2010 well outpaced the 3 IPOs a year earlier — there were only 12 VC-backed IPOs in all of 2009. The $1.25 billion value of IPOs in the third quarter of 2010 also more than doubled the $572 million value of the three deals a year earlier.

More than half, 8 of the 14, IPOs involved information technology companies, with the remaining 6 divided between life science (4) and non-technology (2) companies.

Overall, deal-making is back in style in Silicon Valley and other Technology-driven regions. Fueled by powerful trends in mobile devices, digital media and cloud computing, tech companies are acting on the urge to merge — a sign, let’s hope, of an improving economy.

"The exit markets have seen steady activity this year and solid gains over 2009's dismal numbers," said Jessica Canning, global research director for Dow Jones VentureSource.

The average merger and acquisition deal was worth $27 million, up 23% from the year-ago period.

Private markets deal activity is benefiting from acquisitions by traditional corporate acquirers as well as venture-backed companies such as Facebook and LinkedIn which are making strategic acquisitions.

SAP's pending $5.8 billion purchase of Sybase, IBM’s pending acquisition of Cogent and Hewlett-Packard's pending $1.2 billion takeover of Palm are some of the latest headliners.

For the shrinking venture capital industry, the surge in M&A is providing a welcome return on investments at a time when the recovery in initial public stock offerings (IPOs) remains spotty.

A mix of three factors has made M&A a more vital force in Technology-driven companies - regulatory changes, growing corporate clout and evolving technologies.

Most private companies pondering IPO’s today require more time and revenues approaching $100 million. Given such hurdles, the M&A option becomes more attractive for startup founders, executives and venture investors.

Many promising startups wind up on the shopping list of corporate giants. Cisco Systems, Oracle, HP and Google — as well as non-valley giants Microsoft, IBM and EMC — are known for their acquisition strategies. The nation's 10 largest tech companies collectively have approximately $200 billion in cash on hand.

IPO valuations are also on the rise, with IPO activity increasing five-fold from the same time last year.  The actual IPO valuations have increased by about 60%, with nine IPOs raising $723 million over the whole of the quarter, compared to the IPOs of the same quarter in 2009, which raised $572 million.  The largest IPO of this most recent quarter was the Monrovia, Calif.-based company Green Dot Corp, a provider of prepaid financial services, which raised $164 million.

The year seems to be doing well on the whole, though it still remains far below the stellar explosions of 2007.  So far this year, venture capitalists have sold $17.74 billion worth of companies, up 75% from last year’s total at this time.

Note of Caution for Public Companies Planning an M&A Exit – Shareholder’s are filing lawsuits against Board’s of Publicly Traded Companies for Not Shopping for Multiple Bids in M&A Transactions

Recent legal rulings and cases involving Board members fiduciary duties and shareholders demanding a public company shop around for the best buyer and highest bid is becoming more and more important if you are a CEO, CFO or Board Member of a publicly traded company. 

For public companies who decide to sell to another buyer who approaches them without running a formal M&A process, there is a very high probability the shareholders will sue the company and its executives for a breach of fiduciary duty (for not shopping the company) and seeking out the best possible sale of the company (and highest price). 

The latest wave of shareholder lawsuits include the recent Diamond Management and Technology Consultants (DTPI) sale to PwC, the sale of Internet Brands (INET) to Hellman & Friedman (a PE firm), Abraxis Biosciences (ABII) sale to Celgene Corp., Netezza Corp’s (NZ) sale to IBM, ArcSight’s sale to HP and Sybase’s sale to SAP.

In the latest case of DTPI, the plaintiff alleges that the offer undervalues Diamond Management & Technology Consultants, because while Diamond, like the rest of the market, experienced a stock price decline in late 2008 and early 2009, it has rebounded nicely thanks to record financial results. Indeed, in recent months its stock price has traded over 419% above its 2009 lows. Additionally the plaintiff claims, among other things, that defendants abused their power as directors and officer and agreed to the terms in merger agreement, like a $9 million termination fee, a no shop/no talk clause, recurring unlimited matching rights, and voting agreements, that are designed to ensure the sale of Diamond Management & Technology Consultants to one buyer, and one buyer only - PricewaterhouseCoopers LLP - on terms preferential to PricewaterhouseCoopers.

The full report can be downloaded (free) here:  http://www.generationequityadvisors.com/files/GEA_Quarterly_Update_Q3_2010_.pdf

Generation Equity Advisors (GEA) is an independent investment banking firm focused on the technology and digital media sectors exclusively. Our professionals have completed over $10 billion in transactions and are highly experienced in M&A, corporate finance and capital markets.

Our focus is on the Technology  and Digital Media  industry sectors - specifically on the Software, IT Services, Digital Media and Internet industry sectors in the U.S. and globally.  Globally, we have CEO and CFO level contacts into large corporations, private companies and private equity firms. We have 

completed multiple M&A assignments for international / cross-border expansion.

More info on GEA:  http://www.generationequityadvisors.com