The venture capital game is not just about investing in great startups – it is also about helping these companies achieve great exits. In fact, perhaps the key value created by a VC investor is helping companies visualize the exit landscape and opportunities. In this article, we’d like to share some of the experiences of Nexit Ventures in this area.
M&A is the primary route to an exit Statistics show conclusively that the importance of IPOs as the primary exit path has decreased drastically. Just consider this: since 2003, there have been 2,670 M&A exits of VC funded companies. The average transaction price (to the extent the prices are known) has been USD 117M. During the same period, there have been 381 IPOs of VC-backed companies with the average offering amount being USD 100 M. While the comparison between M&A tranasction value and IPO amount is somewhat of the apples and oranges kind, we feel it is still a pertinent indicator of current market conditions. (Source: NVCA and Thomson Reuters 10/2010)
There is some recent evidence of the resurgence of IPOs – however, this time in the APAC region. A report by Ernst&Young shows 66% of the IPOs (both by volume and value) in 2010 happening in the APAC region, with only 13% of the global IPO activity in the US. So, while the reports of the death of the IPO are clearly an exaggeration, M&A has nevertheless taken over the role of the primary exit mechanism, especially for US and EUbased companies.
The acquisition power resides in the US From the GDP perspective, North America, Europe and the APAC region are roughly equal economic powers. However, the distribution of high tech still heavily favors North America - the market cap of listed technology firms is distributed as follows: US 63%, APAC 28%, Europe 9%. This uneven distribution is even more pronounced in the M&A statistics: 74% of tech firm acquirers are US-based, 23% are European and only 2% are APAC-based.
The Power Acquirers
There is a relatively short list of companies that can be described as power acquirers: players with the size, cash balance, and mindset to make major tech acquisitions. This group consists of Apple, Cisco, EMC, Google, HP, IBM, Intel, Microsoft, Oracle, and Qualcomm. These companies made a whopping 804 M&A transactions in the decade from 2000 to 2010. The ongoing consolidation trend of listed US tech companies shows no sign of abatement and they need to get even bigger in order to remain major players. They also have plenty of currency to make acquisitions: a large market cap and a healthy war chest certainly make playing the acquisition game easier.
These companies are weathered buyers with the processes and skill sets to continue their acquisition spree. An experienced buyer tends to know what to look for, what to watch out for, and how to close the deals efficiently. We believe fortune will favor the experienced and well prepared more than the merely brave.
And their targets are...
When the buyer behavior of the power acquirers is analyzed, some trends emerge. Perhaps not surprisingly, the buyers tend to be heavily US-focused (proximity and familiarity of corporate culture make acquisitions easier), with roughly 75% of the transactions happening in North America.
One exception to this rule is Cisco Systems, which is in fact even more domestic-minded than most: it’s acquisition targets are 90% North American. Of the power acquirers, only HP, IBM, and Intel are what we consider truly international-minded acquirers: roughly 40% of the acquired companies are from outside of North America. For the sake of comparison, the two Nordic telecom power players have taken very different approaches: Nokia is USA-centric and mimics closely the US-based players with its 70/30 acquisition distribution, whereas Ericsson has made over 60% of its acquisitions in Europe and almost half of those within the Nordics.
In relative terms, the Nordics have fared better than the rest of Europe when the number of acquisitions is compared to the GDP share of these countries, and, in fact, the largest contributor to this has been IBM.
But the reference point set by Israel is even higher - with a population of only a third of the Nordics, they have generated an M&A volume as large as the Nordic countries combined. This underlines the importance of a strong network and visibility in US, an area where Israel has an advantage over most European countries.
Meanwhile, on the mobile front...
If we take a narrower scope and just look at the mobile sector M&A activity, the major trends stay remarkably similar.
US-based acquirers (with over 1,300 acquisitions) have made about 81% of their acquisitions in North America, with just 14% and 5% coming from Europe and the APAC region, respectively.
EU-based acquirers (less than 1/3 of the US activity) have made 67% of their acquisitions in Europe, 25% in North America, and 8% in Asia. This picture makes sense for much of the same reasons (although in reverse) as to why the US acquirers haven’t been so keen on European targets. APAC acquirers have been very quiet with just 38 acquisitions, but nearly half of those have been outside of the APAC region. APAC companies have traditionally been rather low in the value stack, gaining prominence mainly as the source of inexpensive and plentiful resources. This dynamic might change in the near future as the domestic markets in APAC are rapidly growing and the APAC players are looking to occupy positions higher in the stack.
For Nexit, the power of the US M&A market has been one key inspiration behind our transatlantic bridge strategy. We create value for our non-US portfolio companies by connecting them to Silicon Valley – the most active, highest-valuation technology M&A market. To learn more about our views on M&A and how we create added value, please look at the “Nexit Game Plan” info box below or just hook up with our partners located in Helsinki, Stockholm, and Silicon Valley.
The Nexit Team