The amount generated by venture-backed mergers and acquisitions increased 75% in the first quarter of 2004 compared to the previous quarter, according to Thomson Venture Economics and the National Venture Capital Association (NVCA).
During the first quarter of this year, 77 venture-backed companies were merged or acquired for a total disclosed value of just over $4 billion, up sharply from the fourth quarter of last year when 71 targets accounted for $2.3 billion.
The Q1 figures represented the fourth straight quarter-on-quarter improvement in M&A-based liquidity after two years marked by lethargic exit markets. Also, the last time venture-backed M&A values surpassed $4 billion was the first quarter of 2001 when 75 companies attracted $8.55 billion.
Of the 77 deals in the first quarter, 45 reported a transaction value. Among this subset, the average deal size was nearly $90 million, a 32.3% increase over last quarter’s average of about $68 million. It was also the largest average disclosed deal size since the previously mentioned first quarter of 2001.
The increase signals that valuations may be on the rise in 2004 after years of depressed private company valuations. Although acquisitions have always provided more venture-backed exits than any other option, they have been used more often in recent years as IPO activity has dropped. But rising valuations represents good news for investors, since such a trend will support stronger private equity performance.
“The rise in valuations is a positive development towards healthy returns,” said Mark Heesen, president of the NVCA.
Canaan Partners, for one, expects 2004 to bode well for M&A activity. The Menlo Park, Calif.-based firm saw five of its portfolio companies get acquired last year. Canaan General Partner Eric Young says he expect more in 2004.
Meanwhile, a sector breakdown in the first quarter shows software targets continuing to dominate with 23 deals and a total disclosed value of $1.35 billion, which included two of the top 10 transactions.
VMWare’s acquisition by EMC Corp. for $625 million was the quarter’s largest transaction, while Aelita Software was bought for $115 million by Quest Software.
The average deal size for the 14 software companies reporting values was $96.5 million, a dramatic increase over last quarter’s average software deal size of $38.7 million.