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A Cure for the Common M&A Slowdown?

How do you sell a venture-backed company for a billion dollars or more? Build something that’s worth at least two billion.

That was one of the observations from the M&A panel at last week’s Venture Alpha conference in San Francisco.

Panelists from the venture and corporate M&A side had several thoughts on why the pace of large acquisitions has slowed some in recent months. The last billion-plus venture-backed deal with a disclosed valuation was VMWare’s purchase of virtual networking company Nicira Networks in July. And while the IPO market has produced some big returns, acquisitions of venture-backed companies haven’t kept pace.

Barry Eggers, managing director of Lightspeed Venture Partners, a Nicira backer, said one of the reasons some top-performing venture-backed companies may not be selling is that they currently are able to launch successful public offerings. A case in point was human resources software provider Workday, which went public this month and is currently valued over $2 billion.  If a company believes it can go public that pushes up the price for a potential acquirer, often beyond what they’re willing to pay.

Other potential factors holding up M&A included political and economic uncertainty with the impending election and “fiscal cliff.”

Yet when a company is disruptive enough, incumbents have historically been willing to write some really big checks. Sean Dempsey, co-founder of Merus Capital and a former principle of corporate development at Google, points to his former employers’ acquisition of YouTube, a deal he worked on, as an example. Google initially made an offer the YouTube rebuffed, considering it too low. As the video site continued to grow, Google upped its offer to $1.65 billion – a price YouTube couldn’t refuse.

Some particularly interesting insights came from Marc Brown, managing director of corporate development at Microsoft. Though Microsoft is certainly known for making large acquisitions (its purchase of enterprise social software provider Yammer for $1.2 billion in June comes to mind), that’s not the software giant’s preferred approach. Rather, Brown says, Microsoft looks for acquisitions in the $100 million or so range, and also lower, which come with products and technology it can integrate into its existing offerings.

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