Investors See M&A Surge Continuing In 05

When Avid Technology acquired M-Audio in August for about $80 million in cash and an additional $85 million in stock, the deal was quite the windfall for Summit Partners. The Boston-based private equity firm had invested about $3.5 million in the digital audio technology company, according to The MoneyTree Survey.

Indeed, Summit was one of a number of firms that had a good year in 2004 on the M&A market. Summit says that 10 of its portfolio companies last year were acquired, including M-Audio and Axis Systems, which Verisity Ltd. bought for about $80 million in February. In fact, the firm says that during a nine-month span last year, the M&A market was so robust that its investors made 3.8 times their invested capital.

And Walter Kortschak, a managing partner in Summit Partners’ Palo Alto, Calif.-based office, doesn’t expect a slowdown in 2005.

“This year is shaping up to be another strong year for our firm and our portfolio companies,” says Kortschak, who noted that firm saw another portfolio company get bought in early February. “The marketplace is ripe for a high volume of buyouts and acquisitions by private equity firms.”

Last year, 333 venture-backed companies were acquired, compared to 291 in 2003 and the most since 350 were bought in 2001, according to figures released by Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.

Of the 333 VC-backed companies that were acquired, 181 companies disclosed deal terms, which showed a total value of $15.1 billion. That figure accounted for nearly 60% percent of the total dollars returned to venture investors last year. In comparison, 90 VC-backed companies launched an IPO in 2004, raising $11 billion, although the IPO total is partially skewed by the $1.6 billion IPO of Goggle and the $1.8 billion IPO of Semiconductor Manufacturing International Corp.

And Kortschak and other investors definitely feel the good times will continue to roll. Steven Bernard, director of M&A market analysis for the Chicago-based investment bank Baird, says that the healthy M&A market is attributable to corporate buyers. He notes that public companies, which make up about 90% of M&A activity, were largely absent in previous years, but they came back last year.

Thomas Penn, general partner of Radnor, Penn.-based Meridian Venture Partners, calls it a marriage made in heaven. Public companies, he notes, tend to have below average R&D budgets, while VC-backed startups are doing most of the vital research. As the startups mature, they are usually getting bought out. However, while none of that is unusual, last year proved to be a great year for VCs to sell their portfolio companies, Penn says. Biotech and the life science companies had a good year on the IPO market last year, but M&A is where the action is now, Penn says.

Meridian was able to cash out of Implex Corp., a maker of knee and hip joint replacements, last year. Implex, which had about $30 million in backing from Meridian and other investors, was bought for $108 million by Zimmer Holdings (NYSE: ZMH), a supplier of medical equipment.

Penn expects to see more of Meridian’s portfolio companies get bought this year. “The orthopedic market is poised to have a good year in 2005,” he says. “It’s a great space to invest in and we expect M&A activity for it this year.”

In fact, of the 11 industries that Baird tracks, seven industries saw double-digit growth of M&A activity in 2004. The busiest sector was health care, which saw a 20% jump in deals over 2003, Baird reports. Telecom had the largest rebound, with a 350% increase in deals from the year before. All together, Baird last year tracked more 9,000 acquisitions of mostly non-venture backed companies.

“The economy is still good and CEOs are still confident,” Bernard says. “So without a change in those factors and without going out on a limb, I expect a continuation of more of the same in most industries in 2005.”

Email Alastair.Goldfisher@thomson.com