M&A 2011 outlook - according to VC

Global M&A Set for Surge in 2011
Global M&A activity is expected to increase 36% next year to $3.04 trillion, driven by a big pick-up in deals in the real estate and financial services industries, according to a report released by Thomson Reuters and Freeman Consulting Services.
The survey of over 150 worldwide corporate decision makers showed that instead of bargain-hunting for cheap equity deals, next year's buyers are expected to focus on expanding their core businesses to increase market share, Jeff Nassof, an associate consultant with Freeman told Daily Finance.
"We did the same survey last year and the target [company's] valuations were a factor," Nassof says. "But in this year's survey, people aren't just looking for distressed companies and value deals. They're looking at M&A as part of their competitive strategy."
The real estate market is expected to see a whopping 88% increase in M&A activity, with the financial industry finally recovering to post an anticipated 75% increase, the survey also showed.
While real estate M&A is expected to post a dramatic increase next year, Nassof pointed out that the sector is coming off of a relatively small base. Just $2.23 trillion in M&A deals were done last year.
"The overall 2010 levels are still pretty depressed. It's still nothing like the heydays in 2007," Nassof said. "In real estate, confidence in the economy was the top cited factor. Real estate managers are feeling better about the risk and growth out there."
While M&A in the financial industry is normally market-share driven, next year's activity will be marked by efforts to comply with government regulatory changes that call for big investment banks and institutions to wall themselves off from riskier investments, Nassof said. Last spring's financial reform legislation is forcing some big banks to shed riskier assets including hedge funds and certain derivatives.
Another industry expected to see an increase in M&A is health care, where the survey projects a 16% increase next year, largely due to consolidation as a side effect of healthcare legislation.
As usual, technology companies also are expected to be on the prowl. Executives expect valuations of buyouts will remain "reasonable," even though a recent bidding war between Dell Inc. (Nasdaq: DELL) and Hewlett-Packard Co. (NYSE: HPQ) for 3Par Inc. (Nasdaq: PAR) resulted in a premium of 244%.
Doing Deals in Emerging Markets
Emerging markets are expected to lead the M&A surge in 2011, just as they did in 2010.
Fully 47% of the executives polled said emerging Asian markets are ripe for M&A deals in 2011, with 43% targeting markets in the Americas. By comparison, only 30% are looking at Western Europe and only 18% find Eastern Europe and Russia attractive.
During the first three quarters of 2010, emerging markets accounted for 27.4% of worldwide M&A volume compared to 21% during the comparable period in 2009.
M&A activity in deals across international borders surged during the first nine months of 2010, totaling $723 billion and accounting for 41.2% of overall M&A volume, compared to 26.1% last year.
And Asian companies have the necessary cash to get deals done. According to a report from Moody's Corp. (NYSE: MCO), the total cash reserves of Asian companies touched $231.6 billion in mid-2010. Corporations in the Asian region (excluding Australia and Japan) have seen their aggregate cash balance – including cash, cash equivalents, deposits and short-term investments – grow by almost 60% since the end of 2008.
However, the Moody's report did not take into consideration the reserves of financial companies, in which case the total cash reserves figure would have been much higher.
U.S. companies had cumulative cash holdings of about $1 trillion, over four times more than their Asian counterparts, but the average cash balance of Asian companies was almost double that of US companies, the report noted.

Where will flow this cash?


Confidence edged upward in the fourth quarter of 2009 with most responding venture capitalists satisfied that the macro economy has stabilized enough to allow for the resumption of a nearer to normal venture environment. While concern remains over potential economic landmines in the future

(e.g. withdrawal of government stimulus, increasing interest rates, harsher tax treatment, etc.) the notable return of exit opportunities – especially headline acquisitions - is breathing life into the venture business model and likely presages an increasing quantity and quality of exits in 2010. A steady flow of attractive investment opportunities continues. And the difficult economic climate of the last two years has selected out many of the weaker ventures from the mix, thus allowing the survivors to operate in a less cluttered field where they are better able to sell into corporate and retail markets that have pent up demand for the best solutions. Still, concern persists over decreased capital commitments from institutions and the resulting lack of funds for promising investment opportunities. In the following, I provide many of the comments of the participating venture capitalist respondents along with my analysis. Further, all of the Index respondents’ names and firms are listed in Table 1 save those who wished to remain anonymous.
Deal flow appears strong. Bruce MacNaughton of Crosslink Capital confirmed “We’re seeing more
promising startups than we’ve seen in quite awhile.” And Debra Beresini of invencor added “Momentum is beginning to build as valuations are coming to equilibrium and more investments are made. We have heard ‘talk’ that many firms are looking at seed and early stage investments again, and others are focused on those companies closer to revenue. In either case, it means investment into new companies which fuels the economy…” In fact, confidence in the resilience and innovative capacity of entrepreneurs has remained robust through the broader economic decline.

The stabilizing economy will allow venture-backed firms to increase sales to enterprise customers.

Savinay Barry of Granite Ventures observed “Planning and budgeting visibility for enterprises is much better than it was last year, when the future looked opaque. Hence, they are more willing to loosen their purse strings and one of the beneficiaries for this outflow would be startups.” And Steve Harrick of Institutional Venture Partners also finds that “We are seeing an increase in confidence on the customer front. Businesses are beginning to spend again and cost cutting is giving way to strategic IT initiatives.” Similarly, Richard Yen of Saban Ventures noted “There is healthy optimism in the entrepreneurial community as the economy appears to be recovering and revenue streams will start to flow again.” Finally, Victor Hwang of T2 Venture Capital expects that “Macroeconomic situation has stabilized, and big companies will be tight on cash in coming years, creating more space for entrepreneurs to innovate.”
More exit opportunities are supporting the venture business model. Deepak Kamra of Canaan Partners observes “Exuberant public markets and expected increases in tech spending by enterprises and
consumers.” Chester Wang of Acorn Campus also sees a “limited IPO window opening.” And Dan
Lankford of Wavepoint Ventures noted “We are seeing some increase in M&A activity, which is always a
good sign!”

Venky Ganesan of Globespan Capital elaborated “Nothing succeeds like success. The impending IPO’s of Facebook, LinkedIn, Solyndra, Silver Spring Networks, etc.; the consummated acquisitions of Admob (acquired by Google), Playfish (acquired by EA) and Jajah (acquired by O2) all show that high growth venture backed startups are back. Like moths to the flame when the exits start happening in 2010, the venture money and the entrepreneurs are going to be back (and I am afraid so will the tourists). I am bullish on 2010.” And Shomit Ghose of Onset Ventures agreed “The tech IPO market will begin to return in 2010…” Finally, Jeb Miller of JAFCO Ventures indicated “We're seeing the availability of quality entrepreneurs and an improving exit environment combine to help reignite interest in building new companies around emerging opportunities in digital media, cloud computing, health IT and green IT.

Optimism is returning. Kurt Keilhacker of TechFund Capital stated “While there is some caution with
macro employment problems and worrisome tax policies, there is guarded optimism in Silicon Valley. Indeed, we are witnessing some tectonic technological shifts that are just in their infancy." And Sandy Miller of Institutional Venture Partners declared “We have returned to a healthy normalcy in the technology venture environment. It feels like the pre-bubble 1990s. The exit market has peeked open with an active IPO calendar and greatly enhanced acquisition interest by the big cash-rich technology company acquirers. This in turn is spurring new entrepreneurial start-ups as liquidity comes into the venture business. 2010 should be an active year for both new investments and exits. There is indeed light at the end of the tunnel!”
Looking to the past as prologue, Graham Burnette of Red Planet Capital recollected that “Silicon Valley
has historically produced the most value in the years following a crash. In the words of one of my partners, many generations of Silicon Valley companies have been built on the rubble of the previous generation. We now have a situation in which many weak firms have been cleared away and talented people are available to help a new generation of exciting companies to grow. Entrepreneurs with great ideas never went away, and money is again flowing to fund those great ideas. I believe that we are in the midst of a very exciting time.”
However, the supply of venture financing is limited. Robert Ackerman of Ccommented

“I expect to continue to see more demand for capital for start-up ventures than there will be available capital. The consolidation of the venture industry and difficulties for many managers in new fund formation will only complicate this supply/demand in balance. That said, there is no shortage of quality start-up investment opportunities.” And Joe Mandato of De Novo Ventures explained “there is still much uncertainty in the venture industry; the bar for investments is higher, the timelines for exits is longer and the exit options are fewer. Compounding this is the increased challenge to raising new funds.” One VC respondent who wished to remain anonymous observed “continued challenges in raising money,” while another confirmed that “financing environment for small entrepreneurial companies continues to be treacherous.” In fact, Thomson Reuters and the National Venture Capital Association reported that 2009 was the slowest fund raising year (by number of new or follow-on funds established) since 1993.2
Natural selection still rules. Tom Rodgers of Advanced Technology Ventures detailed “The
environment is going through a natural Darwinian contraction. There is already less money going towards fewer companies. We will see the stronger companies surviving and thriving and the more disruptive and resilient approaches will continue to be funded. This is good for the long-term health of the environment. Venture firms with active funds are looking to put money to work but are taking a very disciplined and opportunistic approach. However, many well run companies will continue to focus on rational strategic growth during this climate as opposed to high growth that may come to involve a risky price tag.”