M&A activity perks up; but is it here to stay?

Mergers and acquisitions appear to be on the upswing, although it’s not clear whether last week’s series of big deals is an anomaly or a sign that confidence in the economy has finally improved.

Accel Partners had two exits from its portfolio in one day last week as Google bought AdMob, a mobile ad network, for $750 million in stock, and Electronic Arts paid $300 million (plus committing another $100 million in possible earn-out payments) for Playfish, a social gaming company.

Accel would not discuss its returns on either transaction. prior to the acquisitions, AdMob had raised about $47 million in VC funding from Accel, Draper Fisher Jurvetson, Sequoia Capital and Northgate Capital Group, while Playfish raised about $21 million from Accel and Index Ventures, according to Thomson Reuters (publisher of PE Week).

Index Ventures also achieved liquidity in another deal last week involving PanGenetics BV, a Dutch antibody developer, which agreed to sell the rights to an antibody to Abbott Labs for $170 million. PanGenetics has raised about $51 million in VC funding from Index Ventures, Edmond de Rothschild Investment Partners, Biogen Idec New Ventures, Fortis Private Equity, Forbion Capital Partners and Credit Agricole Private Equity.

Meanwhile, Logitech International paid $405 million for VC-backed LifeSize Communications, a maker of high-definition video communications products that had raised $90 million in venture funding for a 4.5X return. VCs included Austin Ventures, Redpoint Ventures, Pinnacle Ventures, Norwest Venture Partners, Sutter Hill Ventures and Tenaya Capital (f.k.a. Lehman Brothers Venture Partners).

The string of recent exits includes Intuit Inc.’s acquisition of Mint.com for $170 million. The transaction was completed earlier this month.

The acquisitions follow a rather lackluster third quarter for M&A activity. Just 62 VC-backed companies were sold with disclosed values of $1.2 billion during Q3. This compares to 64 VC-backed companies being sold in the prior quarter, with $2.57 billion in disclosed value, according to the National Venture Capital Association, based on data from Thomson Reuters. It is worth noting that eight more companies disclosed their sale price in Q3 than in Q2.

But the high prices paid for VC-backed companies last week, although it made investors gleeful, created concern about another Internet bubble.

“I never thought [AdMob] would get that kind of a price. It’s truly amazing,” says Linda Gridley, founder of the investment bank Gridley & Co. “But who thought Intuit would pay $170 million for Mint.com?”

Gridley predicts that Google, Microsoft, Yahoo, Adobe and other large media companies will continue to buy more Internet ad networks, but she says that she sees a danger of price distortion with the AdMob acquisition pushing many potential buyers out of the market.

“Google and Microsoft can’t buy everything. So the downside is that everybody thinks they’re an AdMob, but not everybody is,” she says.

Indeed, it’s not surprising to see Google on an acquisition tear. In September, Google CEO Eric Schmidt told Reuters that the worst of the recession is behind the company, and he expects the company to start doing about one acquisition a month.

The news was seen as a positive light for VC-backed startups. Not only is Google’s acquisition pace seen as a barometer of M&A activity, but startups haven’t felt any love from Google since 2006, when the Internet search giant bought three VC-backed companies, including YouTube.

“My estimate would be one-a-month acquisitions and these are largely in lieu of hiring,” Schmidt said. “There may be larger acquisitions, but they really are unpredictable.”

However, Gridley tempers that optimism as she notes the fear is now that everybody will think all their portfolio companies can go public or sell to Google.

“For some, that will work,” she says. “But for the vast majority, it will screw pricing again. Investors were just starting to get more in line, thinking they can sell their companies again at reasonable prices.”

Jim Goetz, a partner at Sequoia Capital, which led the $4 million Series A round in AdMob in 2006, says that he considers the AdMob acquisition price as undervalued. After only three years, the company was at $100 million run rate in revenue and still had most of the cash it had raised, he notes.

“That’s one reason why we pushed for stock,” Goetz says. “So there’s a meaningful upside in AdMob’s future.”

People have forgotten how long it took for an economy to develop for e-commerce, he says.

Several venture capitalists speaking in San Mateo, Calif., last week at a Dow Jones LP Summit said that there will be a big pick-up in VC exits next summer, when thousands of five- to 10-year-old companies will be mature enough for an acquisition.

What’s uncertain is how many of those companies will be ripe for an acquisition or prefer to launch an IPO instead.

Many of the VCs at the conference last week aired what have become usual complaints about the harms of going public for small-cap companies.

“Young companies need to be bought and held to grow and flourish,” says Brian Jacobs, founder and general partner of Emergence Capital Partners.