[Editor's note: We asked Gerald Hwasta to make sense of all the buyout activity going on]
We’re seeing a lot of action suddenly in the area of technology buyouts, and it’s impacting Silicon Valley.
These transactions are driven by private equity firms searching for businesses with reliable cash flows. The firms, including mine, want to acquire these businesses, often with borrowed money (debt), and then try to increase the cash flows even more, in order to sell these businesses for a profit in the future.
As the WSJ reports today (Friday), private equity investors are focused on companies whose market value doesn’t reflect the cash their operations generate. Cypress Semiconductor Corp., Atmel Corp., both of Silicon Valley, and STMicroelectronics NV are just the latest potential targets. This follows lots of other recent action, including targets Freescale Semiconductor, Philips Semiconductors (NXP), Agilent Technologies (Avago) and some of Intel’s units.
Historically businesses acquired in buyouts have been steady cash flow entities, which gave lenders comfort. Why have these lenders and the buyout firms moved into technology, a segment of the economy that traditionally had erratic financial results, far from the steady cash flow businesses that attracted buyout investors?
The answer is that many sectors of technology are established, i.e. “mature.” Whether operating as strong cash flow businesses or still needing operating transformation to achieve profitability, companies in the technology field are increasingly attractive to buyout firms.
At a time when Sevin Rosen has declared that the VC model is broken, buyout firms are raising record sums of capital. Dow Jones reported that buyout funds raised $172.2 billion in the first three quarters of 2006. This fund-raising pace is on target for 2006 to be an all-time record for capital raised.
In 2005, 71% of the number of technology deals was between $10 million and $500 million in value, indicating that over 80% of the deals were less that $500 million in value.
It is in this “mid-market” segment of the market where my firm, Shah Capital Partners is focusing its efforts on technology buyouts. Even the large buyout firms are now going to raise dedicated funds to compete in this highly attractive segment of the market.
Venture capital still performs a very significant role in business formation and driving technology innovation, but like all industries, many technology companies are maturing, and with that maturation comes the need for a different approach to investing. Mid-market technology buyouts have come of age.
6 Comments
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Alexander Muse said:
This story is a bit bigger here in Dallas. Turns out there might be quite a bit more to the story at Sevin Rosen than first came out. Dan Primack is suggesting that they pulled a snow job on the New York Times:
http://texasvc.weblogswork.com/2006/10/14/dallas-vc-caught-in-snow-job
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Krish said:
Buyout firms will survive at any time so long as they are good at cherry picking. While being in India, I know the transformation that’s happening only too well…! There are enough and more funds sloshing around here even as our market is at its historical peak - just that the difference is that it’s only the stocks that constitute the Benchmark indices ( SENSEX and NIFTY ) which are soaring…beneath which there is one helluva’ choice for mid cap corporates with attractive valuations.
Gerald, if you would like to focus on this part of the world, just get in touch.
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Darrel Dawkins said:
smart & good looking, how about a visit to Planet Lovetron
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john b. said:
very interesting. thanks for the insights.
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Michael Faught said:
Gerald, you’re certainly correct about PE firms and their growing focus on technology buyouts. In my opinion however there is another, at least as big, opportunity in the space between venture capital and technology buyouts….technology-driven growth acquisitions. This is a buyout, not venture model, focusing on acquiring cashflowing but mundane “me too” operating companies (at commodity multiples) and utilizing (pre-sourced and “turnkey”) technological innovation to immediately decommoditize the target acquisition’s product or service. In turn, this enables the capture of market share (driving up revenue) and premium pricing (driving up margins) which, obviously, drives cashflow improvement, profitable exits (at premium multiples) and outsized returns to investors. By virtue of the fact that we focus on acquiring these boring “going nowhere†commodity companies, we avoid auctions and buy right….ultimately, this is all about legitimately proprietary dealflow. Gerald, if you (or any other VentureBeat readers) are at all interested in this strategy, I’d love to discuss this with you in more detail. Feel free to contact me at MFFaught@aol.com. I’m in Los Angeles.
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Nina Moric said:
Hey!…I found your site via Yahoo! when i was searching for cash flow model, and this post regarding Technology buyouts come of age really sounds very interesting to me.. Thanks.
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11:36 am
VentureBeat » VC investors doing well, mega buyout guys doing even better said:
[...] But then you’ll see that the next best performing group is “mega buyout.” Those investors spend billions to buyout major companies, are reporting a 28.5 percent uptick in their investment performance over the past year alone. That shows you why there’s so much excitement in this buyout area, and Silicon Valley is seeing its share of action. [...]