Shopping Season

In sales, they say you always get what you pay for. By that measure, buyers of venture-backed technology companies didn’t get much of anything last year.

It was one of the decade’s worst years on record for VC-backed tech M&A. Acquirers bought just 203 venture-backed technology companies worldwide for a combined $6.7 billion in disclosed valuations, according to Thomson Reuters (publisher of VCJ). That made 2009 the worst year in terms of the number of VC-backed tech acquisitions (the previous low point was 251 in 2003) and the second worst year in terms of the amount paid (after 2002, when disclosed valuations totaled just $5.6 billion).

Given how lousy last year was, it isn’t terribly surprising that most VCs believe this year will be better for M&A. A December survey by the National Venture Capital Association found that 91% of respondents expect the number of overall acquisitions to increase in 2010 compared to 2009. And 63% expect the value of those deals to be higher.

January already showed signs of improvement, with 26 VC-backed tech startups purchased for a combined $752 million in disclosed valuations, up from 20 such companies purchased for $240 million in January 2009. But before you break out the bubbly, you should be aware that we’re still far off the pace of January 2008, when 36 VC-backed tech companies were snapped up for $1.9 billion.

VCs can only hope (pray?) that large acquirers will follow through on their rhetoric.

“I still view it as a target rich environment,” says Steven Mills, senior vice president in charge of IBM Software Group, which accounts for about $20 billion in annual revenue within IBM. Big Blue has already done two deals this year, paying undisclosed amounts for Initiate Systems, a venture-backed developer of data management software, and Lombardi Software, a maker of business process management software.

IBM’s not the only large-cap technology player snapping up venture-backed companies in recent months:

Cisco spent nearly $900 million on three purchases last year—digital camcorder maker Pure Digital Technologies ($590 million), software developer ScanSafe ($183 million) and workflow management toolmaker Tidal Software ($105 million).

EMC has purchased three venture- and private equity-backed companies since last spring for undisclosed prices: ConfigureSoft, FastScale Technology and Kazeon Systems.

Google bought six companies last year (after buying just two the prior year), including VC-backed mobile advertising company AdMob ($750 million), publicly traded video compression company On2 ($106.5 million) and VC-backed VoIP communications network company Gizmo5 ($30 million). Google so far has kept up the pace this year, agreeing last month to pay $50 million for social search engine Aardvark, which had $14.4 million in backing from August Capital Management.

• And Oracle has done three deals (all for undisclosed prices) in the first six weeks of this year. It bought venture-backed Web services software developer AmberPoint, enterprise data solutions provider Silver Creek Systems and telecommunications management systems provider Convergin (rumored to have sold for $70 million to $100 million).

Acquirers with market caps below $20 billion have also proven they can bankroll multiple deals. Adobe Systems recently secured $1.5 billion in low-interest debt that it says may be directed to acquisitions. Executives at Intuit, which snapped up personal finance management site last year for $170 million, say they are in talks with several startups about potential purchases. And Eden Prairie, Minn.-based e-commerce software provider Digital River proved that even a company with a sub-$1 billion market cap can pull off a shopping spree. It bought two venture-backed companies in the past year: Softonic, which runs a software download portal, and FatFooGoo, operator of a platform for trading virtual goods.

But don’t expect many acquirers to be shelling out large sums for money-losing startups with scant operating experience. “For venture-backed companies, M&A activity will likely be focused on relatively mature companies that have achieved profitability or have a rapidly growing revenue base and a clear path to cash flow break-even,” predicts Dan Deeney, partner and co-founder of New Venture Partners, which focuses on corporate technology spin outs.

That may be a function of the fact that the slow exit environment for the past few years has resulted in a fatter pipeline of more mature acquisition targets. And while VCs may be disappointed by continued sluggish demand for IPOs, acquirers see it as a good thing. “Buying companies back in the 1990s was hard because you had to compete with the IPO premium,” observes Mills. Today, he says, the situation is reversed and “the exit opportunities for startups are clearly constrained by the IPO market.”

But it’s not just that. For acquirers, it’s the combination of a slow IPO market, fat pipeline of mature private companies, nascent economic recovery, and sharp gains in their own share prices that appears to be fueling interest in M&A. That and a perception that valuations, while not exactly cheap, remain low enough to merit serious consideration.

VCJ spoke with five companies in the $1 billion to $35 billion market cap range which have both a history of buying venture-backed companies and an expressed commitment to exploring M&A opportunities this year. We also focused on acquisitive companies with an expressed interest in sectors that have a high concentration of venture-backed startups, such as cloud infrastructure, payments technology, mobile computing and software-as-a-service. All say they are actively looking to buy venture-backed companies.

For venture-backed companies, M&A activity will likely be focused on relatively mature companies that have achieved profitability or have a rapidly growing revenue base and a clear path to cash flow break-even.”

Dan Deeney

If you want to get into the heads of dealmakers at Adobe, Digital River, EMC, Intuit and Yahoo, then read on…

Adobe Systems

If one had the foresight to purchase a single share of Adobe Systems in 1986 and held it till now, the return would be on the order of 18,000 percent. Not bad for a company that made its market debut as a little-known developer of video editing software started with $5 million in venture funding.

Today, Adobe’s market cap hovers around $16 billion, and its portfolio of digital media tools includes such familiar names as Photoshop, Flash and PDF. Over the years it has expanded its scope—from image editing to multimedia software to analytics. To drive that transformation, Adobe has maintained a healthy appetite for M&A, using acquisitions both to bolster its dominance in existing lines of business and to branch into new ones.

“We’re constantly on the lookout for small technology tuck-ins,” says Shantanu Narayen, who has led Adobe in several large and small transactions since taking on the CEO post in late 2007. Of course, it’s the large deals that stand out—most notably Abobe’s $1.8 billion purchase of analytics provider Omniture, which closed in October.

Adobe has an appetite for smaller companies as well, paying an undisclosed amount last summer for Business Catalyst, a software-as-a-service provider of tools for building online businesses.

Over the past three years, San Jose, Calif.-based Adobe, has publicly disclosed purchases of five startups. In addition to Business Catalyst, it bought instant messaging vendor Antepo, rich media platform developer Scene7 (which previously raised $49 million in venture funding from 10 investors, including Hearst Corp., Thomas H. Lee Partners and Weston Presidio), online word-processing startup Virtual Ubiquity, and imaging software provider YaWah. (Adobe declined to disclose the purchase prices for all of the companies.)

Currently, Adobe is well-capitalized to do more deals. In January, the company closed on $1.5 billion in low-interest unsecured debt ($600 million at 3.25% and $900 million at 4.75%). Adobe says it plans to use $1 billion to pay down existing debt. The company isn’t planning on using remaining debt for any specific deal, says CFO Mark Garrett, but it is looking to use the money for smaller M&A transactions, along with other initiatives, such as share buybacks.

What is Adobe looking to buy? Narayen didn’t name company names, but he did lay out several areas of strategic interest. One focus is to extend functionality of Flash, particularly in the increasingly popular casual and social gaming arena, which relies heavily on the platform. Another area of interest, he says, is to extend functionality of its applications to the Web, creating tools that allow people to collaborate on projects using its technology, as well as to crack down on piracy. Mobile is also an area where Adobe wants to extend its reach. The company says it is on track to launch the latest version of its Flash Player for smart phones in the first half of the year, despite a standoff with Apple over inclusion in its devices.

In the past, Adobe has also been active as a strategic investor. Between 1995 and 2008, it made investments in 16 startups in the Internet, software and hardware sectors. In 2007, it acquired one of its portfolio investments, Virtual Ubiquity, the Boston-based developer of an online word processor called Buzzword. And in 2008, it invested in four companies: online video provider FORA TV, Internet television service provider Veoh Networks, social networking application developer introNetworks, and marketing software developer Demandbase, according to Thomson Reuters.

Since then, Adobe has disclosed no new investments or purchases of any companies it funded previously. Now that it’s had a few months to digest Omniture, the company may be in better shape to rev up its M&A engine again.


Cash on hand: $1.9 billion.

Stock price on 2/17/10 vs. 52-week high: $33.24 vs. $38.20.

Largest acquisition to date: Bought Macromedia for $3.57 billion in 2005.

Three largest VC-backed acquisitions: Hasn’t disclosed valuations for purchases of companies backed by VCs. Only purchase of a VC-backed company since January 2007 has been Scene7, which raised $49 million from 10 investors, including Hearst Corp., Thomas H. Lee Partners and Weston Presidio.

Technologies most interested in acquiring: Anything that extends the functionality of its applications to the Web and mobile platforms, as well as anti-piracy technologies.

We’re constantly on the lookout for small technology tuck-ins.”

Shantanu Narayen

Point person for M&A: Paul Weiskopf, senior vice president of corporate development.

Sources: Thomson Reuters and VCJ reportingDigital River

Based in Eden Prairie, Minn., and with a market cap of $900 million, Digital River isn’t the stereotypical serial acquirer of venture-backed companies. But over the past three years, the e-commerce software provider has acquired or bought stakes in at least four VC-funded startups in a bid to expand its reach into areas such as virtual goods and online payments, as well as broaden its presence in international markets.

“We’ve been very acquisitive historically,” says CEO Joel Ronning. “It’s been an important part of our technology growth and our contract growth.”

Currently, Ronning says, the company has a portfolio of about 100 companies that it is considering as potential M&A targets. The list includes a mix of venture-type companies it may acquire for technology and sector expertise, as well as similar businesses (or “Mini Me’s,” as Ronning refers to them), which it can buy to build its customer base.

Ronning told investors earlier this year that acquisitions will be an “important growth driver” in 2010. One part of the strategy, he says, will be to acquire products, services, contracts or technologies that help expand the company’s geographical footprint.

Ronning says the company will also look for deals that expand its product offerings. Digital River’s core business is providing outsourced e-commerce services. Over the years, its stable of services has grown to include hosting of stores and shopping carts, order management, fraud screening, export management and tax compliance.

By venture M&A standards, Digital River isn’t a big spender. Typically, acquisitions and partial equity purchases fall well below the $50 million mark. And executives take pride in bargaining.

“We generally don’t like to pay high valuations,” says Ronning, who complains that in recent years prices have been too high for most of the companies he’s considered buying. More recently, he says, “entrepreneurs are becoming a lot more rational.”

In January, Digital River announced the purchase of a minority stake in Barcelona-based software download site Softonic for $26 million. In Softonic’s case, the prospect of getting a new customer was a key motivator for the deal. With Digital River’s investment, it gets to be the exclusive third-party e-commerce service provider for Softronic and to sell its software titles on the site. For its part, Digital River gets to expand its presence in Europe and Latin America.

Digital River did a similar deal last April with Vienna-based Fatfoogoo, a developer of applications for publishers of casual games, virtual worlds and social networks to carry out micro-transactions. Under terms of the agreement, Digital River will integrate its e-commerce platform with Fatfoogoo’s tools for game publishers, and will also buy a minority stake in the uniquely named company.

The Minnesota company also buys whole companies. In late 2007, it bought Stockholm-based Netgiro, a payment service provider for online commerce that had previously raised $6 million in venture funding from Bonnier Entertainment, Intrum Justitia and Nordic Venture Partners. Digital River paid $27 million for the company, plus potential additional payments for Netgiro shareholders based on the combined company achieving performance targets.

The Netgiro deal came a few months after Digital River purchased the assets of a shuttered Silicon Valley-based micropayments provider, BitPass, which had previously raised $13 million from venture backers that included Cardinal Venture Capital, Garage Technology Ventures, RRE Ventures and Steamboat Ventures.

Other venture-backed companies acquired by Digital River include Direct Response Technologies, an online direct marketing firm it bought for $15 million plus potential earn-outs in 2006, and Commerce5, an e-commerce application developer it purchased for $45 million in 2005. Pittsburgh-based Direct Response previously raised $15 million from INT Media Group. Aliso Viejo, Calif.-based Commerce5 previously raised $58 million from backers including ABS Capital Partners, Blue Rock Capital, Lazard Technology Partners, Mobius Venture Capital and U.S. Venture Partners.


Cash on hand: $408 million.

Stock price on 2/17/10 vs. 52-week high: $26.51 vs. $41.20.

We generally don’t like to pay high valuations. [Lately] entrepreneurs are becoming a lot more rational.”

Joel Ronning

Largest acquisition to date: Bought Element 5 AG for $122.5 million in 2004.

Three largest VC-backed acquisitions: Commerce5 ($45 million in December 2005), Netgiro Systems AB ($27 million in September 2007), and Softonic ($26 million this year).

Technologies most interested in acquiring: Anything that expands its product offerings and the geographic reach of its core business of offering outsourced e-commerce services.

Point person for M&A: Steve Schmidt, VP of corporate development.

Sources: Thomson Reuters and VCJ reportingEMC

If EMC were to choose a mascot, it might do well to pick the hedgehog.

In a given night, naturalists say, the hedgehog is capable of eating the equivalent of one-third its body weight. EMC, while admittedly slower to consume, has proven it can execute the same feat in its M&A strategy.

Since 2003, the Hopkinton, Mass.-based company—currently valued around $35 billion—says it has paid close to $10 billion for more than 50 strategic acquisitions. It’s a strategy that, to date, has paid off well. Just one of its acquisitions—the 2003 purchase of VMWare for $625 million—has returned close to $17 billion in just over six years, an ROI multiple few VCs could match.

Lately, EMC’s M&A machine has shown no signs of sputtering. Last year, it purchased three venture-backed software companies, as well as Data Domain, the formerly venture-backed provider of backup and disaster recovery tools that went public in 2007. This year is off to a brisk start, as well, with EMC announcing in January that it will pay an undisclosed price for Archer Technologies, a provider of software tools for governance, risk and compliance (GRC) backed by Bain Capital Ventures.

Matt Olton, EMC’s vice president of corporate development, declines to reveal where EMC is looking to buy next, noting that “once people are aware that EMC is interested, prices inevitably go up.”

EMC watchers say the company continues to be interested in startups in GRC, as well as its core area of storage, particularly if they offer disruptive technologies.

As for deal flow, Olton says it comes from “every imaginable source.” That includes investment bankers, venture capital and private equity investors, other employees and managers, as well as engineering organizations such as standard-setting bodies. If someone tells Olton he should look at a particular company, he first looks for overlap in customer base and a rationale for why combining the two technologies would be more helpful to customers.

Ease of integration is also key. For example, part of the rationale for buying Archer Technologies—which offers a dashboard-type application through which companies can see all their risk and compliance technologies in one place—is that the product integrates quite well with EMC’s GRC tools.

Profitability is a plus, but not a perquisite. “If a company could get to $50 million in revenue but has to sacrifice short-term profitability, I’d much rather see that,” Olton notes. “That’s much more favorable than a company that gets to $10 million in revenue and is profitable, because I don’t know if that $10 million is scalable.”

What about price? Olton says valuation is an important consideration, but “it’s always less important than the key driver of any acquisition we make, which is the strategic rationale.”

Venture-backed companies bought by EMC run the gamut from relatively mature to comparatively new. In September, it paid an undisclosed amount for Kazeon Systems, a Mountain View, Calif.-based maker of archiving and document discovery software founded in 2003 that previously raised $75 million from backers including Clearstone Venture Partners, Focus Ventures, Menlo Ventures and Redpoint Ventures.

If a company could get to $50 million in revenue but has to sacrifice short-term profitability, I’d much rather see that.”

Matt Olton

Around the same time, it paid an undisclosed amount for FastScale Technology, a provider of virtualization tools for data centers founded in 2006 that previously raised $13 million from and ATA Ventures, Covera Ventures and Leapfrog Ventures. A couple months before that, it paid an undisclosed price for Configuresoft, a provider of server configuration and compliance software founded in 1999 that had raised $14 million from backers that included JMI Equity.

The only recent EMC deal with a disclosed valuation was its July purchase of Data Domain, for which it paid $33.50 a share, or more than $2 billion. “That was clearly fully priced at the time, but the price was very justified,” Olton says.

Once it acquires a company, EMC’s approach to integration is flexible, Olton says. Smaller companies with technologies complementary to an existing business line, which Olton calls “tuck-ins,” fold into the larger business. But larger businesses with an established, successful management team may operate more autonomously post-acquisition.

VMWare was such a case, Olton says. EMC’s managers concluded that to come in and insert “big company processes” would have disrupted VMWare’s momentum. Says Olton: “We tried to lend help as much as we could, but we also tried to stay out of the way as much as we could.”


Cash on hand: $6.7 billion.

Stock price on 2/17/10 vs. 52-week high: $17.74 vs. 18.44.

Largest acquisition to date: Paid $2.37 billion for Data Domain last year.

Three largest VC-backed acquisitions: Valuations generally not disclosed. Recent VC-backed companies purchased include Configuresoft, FastScale Technology and Kazeon Systems.

Technologies most interested in acquiring: Extending security services to a global platform, content management, data protection, resource management and software tools for governance, risk and compliance (GRC).

Point person for M&A: Matt Olton, vice president of corporate development.


Founded in 1983, Intuit is one of those legendary companies that virtually every Silicon Valley venture capitalist initially turned down.

But founder Scott Cook persevered, eventually winning over the hearts and checkbooks of top-tier firms. Today, with a market cap of nearly $10 billion, an industry-dominant position in the tax and personal finance software space, and an active M&A practice, it’s Intuit that can’t keep the VCs away.

This fall, when the Mountain View, Calif-based company was planning an inaugural “entrepreneurs’ day” to meet with startup executives, it put out the word to the VC and startup community. The response, says Greig Coppe, Intuit’s chief corporate strategy & development officer, was hundreds of applications. Of those, 40 made the final cut. The chosen few were rewarded with “speed dating sessions” and one-on-one meetings with Intuit executives and general managers.

The meetings haven’t led to an acquisition yet. But the company is in follow-up discussions with several about M&A or partnership possibilities, says Coppe. And it’s planning another entrepreneurs’ day this summer.

For participants and their backers the hope is to introduce Intuit to its next The then 2-year-old provider of Web-based personal finance management software sold to Intuit in September for $170 million in cash. Previously, had raised just over $31 million from Benchmark Capital, DAG Ventures, Felicis Ventures, First Round Capital, Hite Capital, Shasta Ventures, Sherpalo Ventures and individuals.

[] was not a banker-to-banker deal. It was through these personal relations, which is what we prefer.”

Greig Coppe

While Intuit isn’t known as Silicon Valley’s most deep-pocketed acquirer, it does have a history of using M&A to accelerate growth or expand its footprint in new markets. Besides, venture-backed companies it has purchased over the past three years include PayCycle, a payroll management service, and Homestead Technologies, a site for building Web pages.

Intuit still has dry powder. “My sense is we’ll continue to make strategic acquisitions. We’re not hampered by recession or poor performance,” Coppe says.

The company benefits from being in a fairly stable industry—whether the economy flourishes or contracts, people still have to file taxes and businesses still have to keep their books in order.

Historically, Intuit has done most of its acquisitions in cash. (It had $927 million in cash on hand in October.) Purchases also commonly include performance-based incentives to ensure that key employees stay on and stay motivated. There also seems to be something about the number $170 million. PayCycle, Homestead and Mint each sold for that amount.

In terms of sectors of interest, Coppe says Intuit is especially interested in mobile, with a focus on services that move the company’s core functionalities to mobile devices. Another is payments, with a particular interest in technologies and platforms that work internationally, as well as over mobile devices.

Intuit is also looking to expand its reach into areas such as personal finance and tax filing to a global audience. Currently, more than 90% of the company’s revenue is from U.S. customers. The company would like to grow operations in India and Southeast Asia, in particular, Coppe says.

Like most Silicon Valley software companies, Intuit gets much of its deal flow from investors and entrepreneurs in its own backyard. In addition to signing up for entrepreneurs’ days, Coppe suggests that startups and investors that want to establish a relationship with Intuit contact him and the company’s other M&A decision-makers directly. That was the case, for example, with Mountain View-based, whose CEO, Aaron Patzer, had met with Intuit CEO Brad Smith on multiple occasions. Another tie was that counted Mark Goines, who once ran Intuit’s TurboTax and Quicken business units, among its angel investors.

“It was not a banker-to-banker deal,” Coppe says. “It was through these personal relations, which is what we prefer.”


Cash on hand: $927 million.

Stock price on 2/17/10 vs. 52-week high: $30.32 vs. $31.97.

Largest acquisition to date: Bought Digital Insight for $1.35 billion in 2006.

Three largest VC-backed acquisitions: Homestead Technologies ($170 million in November 2007), ($170 million in November 2009) and PayCycle ($170 million in June 2009).

Technologies most interested in acquiring: Mobile platforms, new approaches to payments and services that expand its reach internationally, particularly in Asia.

Point person for M&A: Greig Coppe, chief corporate strategy & development officer.

Sources: Thomson Reuters and VCJ reportingYahoo

Last year was all about reorganization for Yahoo. It brought in a new CEO, cut staff, negotiated sales of its Hot Jobs and Zimbra e-mail properties, and signed a 10-year deal with Microsoft to handle its Web indexing. And while it did a bit of purchasing—including two venture-backed Internet companies—the emphasis was less on growth through acquisition that on staving losses through cutting.

There are a lot of niche sites that have highly engaged users and specialty content that would fit well with our portfolio and our advertiser needs.”

Carol Bartz

This year, with a leaner operation in place, Yahoo plans to ramp up M&A. In a recent earnings conference call, Carol Bartz took the occasion of her one-year anniversary as CEO to say: “2010 is not about divestitures for Yahoo. … For us 2010 is about acquisitions and investments.”

And while Yahoo doesn’t have any current plans for what Bartz describes as “big acquisitions,” she’s laid out a strategy for smaller- and mid-sized deals in three categories:

The first involves deals in which Yahoo buys a company principally for its technology and the team behind it. An example that fits this paradigm is Yahoo’s acquisition last year of Xoopit, a developer of tools to find photos in e-mail accounts. San Francisco-based Xoopit had raised about $6.5 million in VC funding from Accel Partners, Foundation Capital and individual investors. No financial terms were disclosed for the sale, although one published report put the price tag at about $20 million.

The second category is content related, where Yahoo acquires a company for its audience, content or community. “There are a lot of niche sites that have highly engaged users and specialty content that would fit well with our portfolio and our advertiser needs,” Bartz says. And while Yahoo hasn’t made such a deal in the past couple of years, it has historically pursued such transactions. In the early part of the last decade, it snapped up properties such as, VoIP site Dialpad Communications, and, about three years ago, online contest provider

The third category focus is geographic, with Yahoo looking to make acquisitions to strengthen its presence abroad. Along those lines, the Sunnyvale, Calif.-based company recently purchased Arab Web portal Maktoob. The Jordan-based site had previously raised $5.2 million from Tiger Global.

While Yahoo’s stock price has weathered some rough periods over the past few years, the company is still in a solid position to buy. It has $3.3 billion in cash on hand, a market capitalization of $21.5 billion and operating cash flow of $1.3 billion.

Even with all that money, Yahoo will make a concerted effort to look for good deals and companies that fit into its long-term plans. In other words, it doesn’t want to buy another Zimbra. It paid $350 million in September 2007 for the email company, which had previously raised $30 million from Accel Partners, Benchmark Capital, Redpoint Ventures and others. Just over two years later, Yahoo sold Zimbra to VMWare for less than what it paid, according to technology blog All Things Digital.

“Success in acquisitions is as much about integration and performance measurement as it is about negotiating deals,” Bartz said earlier this year. “Yahoo hasn’t always focused well on post-deal accountability but you can be sure we are committed to it now.”


Cash on hand: $3.3 billion.

Stock price on 2/17/10 vs. 52-week high: $15.54 vs. $18.02.

Largest acquisition to date: Bought for $5.7 billion in April 1999.

Three largest VC-backed acquisitions: Right Media ($680 million in April 2007), Kelkoo SA ($576 million in March 2004) and eGroups ($432 million in April 2000).

Technologies most interested in acquiring: Anything that enables it to broaden its geographic reach, provide specialized content or applications for a desirable niche audience, or tools to improve its existing product offerings.

Point person for M&A: Andrew Siegel, vice president, corporate development.

Sources: Thomson Reuters and VCJ reporting