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An Impending Collision (aka Why Tech M&A is Red Hot)

To call it frothy is an understatement.

In the last eight weeks I have received north of 40 phone calls from venture capital firms and private equity shops. All are offering to play at very high valuations, and many have offered cash if we want to take some money off the table.

Venture capital firms are increasingly being forced to sweeten their offers to compete not only against each other, but against buyers that are swooping in earlier and earlier.

We are in a heated M&A market, that is operating without fear or influence of the broader economic issues. As much press as the sub-prime credit issues and hedge funds have gotten, it does not seem to be influencing decision making in the executive suite. Here's why:

• Valuations at the largest tech companies are near 52-week highs, and they all have huge stockpiles of cash. It is in their vested interest to spend on growth.
• There is a lot of great technology that has been developed in the shadows of the Web 2.0 hype that would benefit from the brand and distribution of a larger player
• Most entrepreneurs I speak to would prefer acquisition over IPO today. The regulatory challenges are not worth dealing with if you can get IPO prices through M&A

Most importantly, I believe the industry is at a crossroads. The convergence of SaaS, collaboration, VoIP, and advertising are turning "frienemies" back into good old enemies.

Microsoft, Yahoo, Cisco, Google, and IBM are all heading straight at each other.

They have all finally figured out that only one or two companies are going to own the front-end for the business user on the Web. Much like Google and Yahoo dominate the consumer start page today, someone has to dominate the business start page.

It will be an application, not content that wins a prize that will be measured in tens of billions of dollars.

Ultimately, business users want to go to a central source for their applications. These applications will include VoIP phone service, email, collaboration, instant messaging, productivity tools, and purchasing.

It might not be easy to see it right now, because they are all approaching it from different angles. Google is using search to acquire users and add apps. Yahoo is using its portal to do the same. Microsoft has tried Live without much success, but has clearly shown a willingness to put billions of dollars behind it.

I believe these efforts will only increase as the collision becomes increasingly obvious. Other than Google, none has emerged with a compelling user acquisition vehicle.

But they all will. They have to.

I believe the tech M&A market will remain aggressive for the next 24 months, until a clear winner starts to emerge.

Until then, those of you who position yourselves in the center of this impact will see the biggest exit.

September 21, 2007 | Permalink

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