The message for middle-market companies at a panel discussion sponsored by Gold Coast Business Forum recently is there is still plenty of money chasing deals and that money is as selective as it’s ever been about picking investment and acquisition targets. The four panel members at the conference, “Outlook 2006: Mergers & Acquisitions and Financing,” told an audience of about 50 participants that venture capitalists are expected to continue the pace of investment that they have shown for the past several years. But a continuing lackluster climate for initial public offerings is limiting the exit opportunities for venture firms, and some are financing later stage rounds than they have in the past. Although the market for initial public offerings is not expected to pick up anytime soon, the panel members noted that some firms are taking replacing the IPO with M & A; deals in order to cash out. “The lack of exit for most VC-backed companies has bolstered the M & A; market,” said John O. Johnson, managing director of The Spartan Group TSG, a boutique investment banking firm based in Glendale. “We’re not just seeing M & A; activity from strategic buyers. We’re also seeing clearly the largest number is among private equity, venture capital funds and hedge funds.” In 2005 there were 56 venture capital backed initial public offerings, down 39.8 percent from 2004. At the same time, merger and acquisition activity remained relatively stable at about 330 transactions. Because investors are finding it more difficult to use initial public offerings to cash out, some are investing in later stage funding rounds, the panelists said. The median age of venture backed companies for the past three years has increased to nearly six years. Prior to 2000, the median age of venture backed companies ranged between three years old and four years old. New investments reached a four-year high in 2005, said Randy Churchill, director of business development at PricewaterhouseCoopers’ Southern California technology practice who also oversees the firm’s MoneyTree Survey, which tracks venture capital investment activity on a quarterly basis. On a national basis, 901 companies received a first round of venture capital investment totaling $5.3 billion last year, compared with 865 companies that received $4.6 billion in 2004. “Over 300 of those companies are later or expansion stage companies,” Churchill said. “VCs are looking for more mature companies to put money into.” But if investors are sticking with companies longer they are not loosening their requirements. Conference panelist Samuel Paisley, the chief administrative officer at ValueClick, a Westlake Village-based online advertising and marketing firm, told the group that his company’s acquisition criterion included not only companies that would add to ValueClick’s revenue stream, but also that the companies acquired had to trade at a discount to ValueClick’s multiple. In one case, for instance, an acquisition that cost ValueClick $122 million in stock, returned $130 million in cash on hand. ValueClick screened “hundreds of companies” in order to affect the 12 acquisitions the company has made in recent years, Paisley said. One emerging trend the panelists noted is the renewed interest in investing in consumer-directed Internet companies. Noting that the Southern California marketplace has presented a number of recent examples, Joseph Marks, managing member of Smart Technology Ventures, said these companies are generating brisk activity. Among the transactions last year, E-Bay acquired Rent.com for $415 million last year; E.W. Scripps paid $525 million to acquire Shopzilla.com, an Internet shopping service based in L.A.; and Viacom’s MTV division paid $160 million to acquire Neopets.com, a children’s entertainment Website. “This is sort of the next generation of the Web with broadband reaching penetration where these companies can all generate larger amounts of cash,” said Marks.
VCs Focusing on Later-Stage Funding