Quattrone Offers Take on Brave New M&A World

The mood in the venture and technology industries is the most optimistic it’s been years, investment banker Frank Quattrone told attendees of this year’s National Venture Capital Association conference.

But with a few industry leaders and emerging sectors dominating the dealmaking, VCs will have to be more nimble than ever to secure big exits for portfolio companies.

Speaking to an audience of several hundred venture industry insiders gathered in Santa Clara, Calif., the founder of four-year-old investment bank Qatalyst Partners chastised VCs for strategic shortcomings and offered a rapid-fire series of predictions on the direction of technology dealmaking.

Quattrone has some credibility on the subject of large tech transactions. Qatalyst, which he founded shortly after successfully appealing a conviction for obstruction of justice in a case involving his former employer, Credit Suisse, focuses on technology companies with valuations of $1 billion and up.

Last year, he says, the San Francisco-based firm was an adviser in five of the ten largest technology M&A transactions. Its deal list for 2011 includes HP’s $12 billion purchase of data analysis software provider Autonomy, Google’s $12.5 billion purchase of Motorola Mobility and Electronic Arts’ acquisition of PopCap Games in a deal valued at up to $1.3 billion.

So how are things’ shaping up in 2012? Apparently, not too badly.

“The IPO outlook is about as positive as I’ve seen in a long, long time,” Quattrone said. That should help M&A valuations, he added, as in past years acquirers have had the upper hand with private companies, as most have not seen the IPO market as a viable alternative. Now that IPO prospects look better, that could spur higher acquisition prices.

However, the short list of deep-pocketed acquirers has shifted in the last couple of years, with the cash-rich growing cash-richer. Overall, Quattrone calculated that the ten largest public technology companies have an average of $34 billion in cash. The other 63 technology companies on the S&P 500, by comparison, are sitting on an average of $2 billion each.

Quattrone segmented the most prominent large cap technology companies in three groups: new leaders, leaders in transition, and last generation leaders.

The new leaders included a group of consumer facing companies he calls the Fab Four: – Apple, Google, Amazon and Facebook. (Quattrone did not specify which would be John Lennon or Ringo Starr in the analogy.) What these companies share in common is a focus on maximizing the amount of time consumers spend on their sites by creating rich “walled gardens” of content and features.

The other five new leaders are VMWare, Salesforce.com, Qualcomm, Citrix and ARM. What they share in common is a steep increase in market capitalization over the last few years. That means they have more money to make acquisitions and are under more pressure to keep their leadership positions, meaning they can pay handsomely for a threatening competitor.

The second group, leaders in transition, had four members: IBM, Oracle, SAP and EMC. These are companies that remain powerful players in their fields, but also recognize that they must contemplate dramatic strategic shifts to stay on top.

The last generation of leaders, meanwhile, are Microsoft, Intel, Cisco, HP, Dell, Nokia and RIM. These are companies that Quattrone views as ceding market dominance. Some have also seen their valuations drop dramatically in the last few years.

Quattrone’s take is that technology M&A is driven by a short list of trends. Mostly, big acquirers are buying companies that help them improve vertical integration, virtualization and cloud services; extend their mobile reach; enhance management of unstructured data; and help them get up to speed on online commerce and offer applications that are social, local, and real time.

On the structural side, M&A is driven in part by the huge cash balances of many large-cap technology companies, combined with inexorable investor demand for growth. Other factors spurring acquisitions include low interest rates, an active contingent of technology-focused private equity firms, and an improved IPO outlook.

But Quattrone had some advice for venture firms that would like to see the pace of new offerings pick up further. His suggestion: Get some new underwriters besides Morgan Stanley and Goldman Sachs.

“You guys should not impose, in my humble opinion, a duopoly,” he said.

Image credit: Reuters, photographed by Stephen Chernin