That's the message from VC and financial experts surveying the M&A landscape. Despite the fact that private company valuations continue to drop, the market is likely to get worse before it gets better.
One reason: Potential buyers -- big vendors such as Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) -- are still resizing their own businesses for 2002, which is shaping up to be the second consecutive year of falling carrier spending levels.
The chances for liquidity at venture-backed companies will only get better if one of two things happen, says Steve Domenik, a general partner at Sevin Rosen Funds. "Either the stock market will recover or, if this goes on long enough, the demand for technology will [improve acquisition chances] since the potential acquirers have all cut back on research and development."
"There's been no need to acquire private companies," says Brian Kinard, a general partner with Blueprint Ventures. "No one else is acquiring them right now."
Kinard also points out that there are probably too many private companies of each kind -- such as MEMS makers -- to be absorbed right now, which may lead to more bankruptcies in certain equipment and component subsectors.
The IPO market for venture-backed companies was grim in 2001 as only one networking and communications company, Tellium Inc. (Nasdaq: TELM), raised as much as $100 million during its public offering (see Market Gives Tellium a High Five). In 2000, 34 networking and communications companies raised a total of more than $5 billion, according to new data from VentureOne.
Semiconductor and software companies had a little more success in the IPO markets, as NetScreen Technologies Inc. (Nasdaq: NSCN) and LogicVision together raised some $200 million during the fourth quarter of 2001 (see NetScreen's Screaming IPO).
Table 2: Venture-backed IPOs, 4Q01
|Company Name||Industry Segment||Amount Raised ($M)||Offering Price||Ticker||Exchange|
The M&A market was also on the skids in 2001, as venture-backed companies were involved in 69 transactions that were valued at $2.7 billion during the fourth quarter of 2001. Not since the fourth quarter of 1995 -- when 39 companies were acquired for $2.5 billion -- has so little been paid for the selling companies, says VentureOne.
Table 1: Top Venture-backed Communications M&A Deals, 4Q01
|Company Name||Amount ($M)||Close Date||Acquiring Company|
|Pacific Broadband Communications||$200.00||12/14/01||Juniper Networks|
As a sign of the times, the large acquisitions announced during the quarter focused more on a quick return on investment rather than a multibillion-dollar price tag. Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), for instance, said it would acquire Ocular Networks Inc. for about $300 million in cash and about $55 million in stock options. But the company expects to see the Ocular acquisition generate $50 million to $100 million in revenues by the end of this year (see Tellabs Nabs Ocular).
Another sign of the times: Two of the largest communication systems mergers that happened during the last part of 2001 involved companies that made gear, not for greenfield competitive local exchange carriers (CLECs), but for cable operators, which seem to be the only credible threat to the digital subscriber line (DSL) services offered by the big phone companies (see Motorola Deals for RiverDelta and Juniper Buys Pacific Broadband ). At the end of the third quarter of 2001, the regional Bell operating companies (RBOCs) had 3 million DSL subscribers, versus 5.9 million cable modem subscribers at the top seven cable companies, according to recent research note by Robertson Stephens analyst Jim Friedland.
Table 3: Top Communications and Networking M&A Deals in 2001
|Company Name||Amount ($M)||Acquiring Co.||Date|
|Amber Networks||$421.00||Nokia Corporation||8/29/01|
|Pacific Broadband Communications||$200.00||Juniper Networks||12/14/01|
|Versatile Optical Networks||$167.10||Vitesse Semiconductor||7/31/01|
For venture capitalists, though, it pays to look, not at what companies are buying today, but at what longer-term problems they're not solving, says Sevin Rosen's Domenik. "I think the thing that will make a difference [for carriers] is really new technology that is so compelling that things have to change. None of this size-of-a-dime, price-of-a-nickel stuff, either."
— Phil Harvey, Senior Editor, Light Reading