Glut of attractive businesses spurs big year for mergers, acquisitions

A high-tech buying spree at both the state and national levels turned 2006 into one of the biggest years for mergers and acquisitions in recent history.

In Washington, at least 57 technology companies participated in a purchase or sale, according to a list compiled by The Seattle Times.

Microsoft made 16 acquisitions. Kirkland-based Who's Calling acquired one company before the tables were turned and it, too, was acquired. Getty Images bought at least three companies, and RealNetworks purchased two, including the $350 million acquisition of publicly traded WiderThan.

This year, Washington state also held the distinction of the biggest venture-backed acquisition in the country. In August, Gilead Sciences paid $365 million for the 87 percent of Corus Pharma it didn't already own; VentureOne valued the entire company at $419.5 million (meaning the deal beat out the $400 million second-place winner LANDesk).

Analysts say there are several reasons for the increase in activity.

Over the last few years, privately held companies have had a hard time providing their investors an exit strategy, either through an initial public offering or a sale. Despite this, some companies were able to hunker down, improve revenues and become profitable, creating a glut of attractive businesses ripe for the picking.

Take Allrecipes.com, which allows home cooks to upload recipes to the Web site, and sells advertising to those trying to hit the female demographic between the ages of 25 and 54.

After the dot-com crash, in typical fashion, it laid off employees and focused on becoming profitable. It achieved that about three years ago and was rewarded earlier this year with six buyout offers.

After considering them all, the Seattle company sold to The Reader's Digest Association for $66 million, said vice president of marketing Esmee Williams.

Williams said this year the timing seemed right. The environment heated up in the social-networking arena, where the company was strong. Also, she said, major media companies started to feel the need for a strong Internet play.

Ironically, eight months after Allrecipes.com agreed to the deal, Reader's Digest agreed to be acquired for $2.4 billion by a private equity firm.

More money in market

At the same time that more companies seemed attractive to buyers, more money also became available to buy them.

The biggest source in recent years is private equity firms, which have gotten a lot of attention for the record amounts of money they raised. Private equity firms typically take control of a company and make changes aimed at making it more valuable.

But money for M&A deals has also come from less-usual places.

For instance, Bellevue-based Ignition Partners tacked an additional $80 million onto its $320 million venture fund specifically for its portfolio companies to make strategic acquisitions. The funds have already contributed to acquisitions by Wireless Services (now SinglePoint), which bought Mobile Media North America, and SeaMobile's $168 million buyout of its largest competitor, MTN.

Aalok Shah, an analyst at D.A. Davidson in Portland, said another source of acquisition activity is smaller public companies. Typically it's the giants, such as Microsoft, Cisco and Intel that do most of the buying, but in the last year or so, second-tier companies became active, too.

"I think there's a different set of buyers right now, an increased number of buyers, and that wasn't the case before," he said. "When you are a second-tier company and competing with another second tier, that's when you start to wonder if one plus one equals two. The question is, can we consolidate and become the top second-tier player?"

From Washington's list, there are a couple of companies that fall into this category.

In May, San Jose, Calif.-based Quantum bought Redmond-based ADIC for $770 million to create one big publicly owned storage company. RealNetworks bought WiderThan to expand its expertise in the mobile space, and Sprint Nextel bought Nextel Partners, which was a Nextel affiliate in smaller markets, for $6.5 billion.

Shah said there's pressure to consolidate, especially in a global economy, and technology companies, especially in Asia, can build the same products for cheaper.

"That's a pretty big threat," he said.

As the chips start to fall, all of it starts to add up to real money.

As of Dec. 20, there were 10,065 U.S. mergers and acquisitions in 2006 with a total value of $1.53 trillion, according to Thomson Financial. That almost matches the level in 1999 but falls a little short from the peak in 2000, when 11,137 deals were conducted for $1.7 trillion.

Headed for a peak

Among Washington's venture-backed companies, mergers and acquisitions may exceed the 2000 figures.

According to data provided by Dow Jones VentureOne, as of the third quarter this year, eight venture-backed deals were made in Washington at a value of $1.1 billion. In 2000, 15 deals accounted for $1.3 billion.

Josh Grove, a senior research analyst with Dow Jones VentureOne in San Francisco, said that although there fewer deals this year, they were at higher valuations than 2000.

The median amount a state company received this year was $120 million, a 150 percent leap from 2000's median of $48 million. It's also significantly higher than the national median this year, $50 million.

"I think that says something good about these companies in Washington state that they are garnering such high valuations. They are obviously strong companies," he said.

"If you add on another quarter, we'll be at the highest total amount paid for Washington companies since 2000. Depending on how the fourth quarter activities go, it may even surpass what we saw in 2000."

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com