By Ryan Flinn, Serena Saitto and Tim Mullaney April 4 (Bloomberg) — Silicon Valley companies looking to put their cash to work may drive a wave of mergers this year, bankers and venture capitalists say. Companies are eager to make acquisitions because many of them have cut research budgets, says Robert Ackerman , founder and managing director of Allegis Capital in Palo Alto, California. That means they’re not as able to fall back on their own ingenuity to fuel growth. More businesses are relying on acquisitions to find their next new product or service, he says. “The product cabinet is bare, but the market continues to move forward,” Ackerman said. “Wherever you see innovation sprint ahead, companies will have a product deficit, and will look to fill it.” Google Inc. , based in Mountain View, is currently one of California’s most acquisitive companies, buying at least five businesses in 2010. It agreed to buy Picnik Inc. last month, acquiring online photo-editing tools. Its purchase of DocVerse provided it with software that lets people share documents over the Internet. The value of the deals wasn’t disclosed. The state’s largest single deal this year was Shiseido Co.’s purchase of San Francisco-based Bare Escentuals Inc. for about $1.7 billion. California deal-making plummeted after 2007, when more than 2,670 transactions totaled almost $254 billion. So far this year, there have been about 530, worth $16.7 billion. That’s a higher number than in the first three months of 2009, although the value was greater in that year-ago period, at about $30 billion. McAfee, Tibco Local acquisition targets include Santa Clara’s McAfee Inc., Tibco Software Inc. in Palo Alto and Cupertino-based ArcSight Inc., according to Brent Thill , an analyst at UBS AG in San Francisco. McAfee and ArcSight both make programs that protect data, which could be more valuable as cyber threats mount. Tibco’s software helps programs of all kinds share information. Goldman Sachs Group Inc. also cited San Francisco’s Salesforce.com Inc. and Palo Alto-based VMware Inc. as possibilities — though those companies aren’t the most likely targets, the firm says. Salesforce.com makes online customer- relationship software, while VMware sells so-called virtualization programs, which help computers run more than one operating system. Representatives from all the targets declined to comment or didn’t respond to messages. Deal Volume In Northern California, there were 45 deals involving venture-backed startups during the first three months of 2010, according to the National Venture Capital Association. That was the highest number in any quarter in at least five years. More than 50 companies in California have at least $1 billion in cash and equivalents, which they could use for acquisitions. They’re led by a Bay area trio: San Francisco’s Wells Fargo & Co. , with $68 billion; Cisco Systems Inc. in San Jose, with $39.6 billion; and Cupertino-based Apple Inc. , with $24.8 billion, according to Bloomberg data. “There’s a lot of cash on people’s balance sheets, so I think it’s a great time for startups,” said Kate Mitchell , managing director at Scale Venture Partners in Foster City, California. “They see that the faster, better, cheaper venture- backed companies are still growing, and they’re not spending on R&D, so they can be accretive.” The value of deals in California topped out at $378.1 billion in 2000 during the Internet bubble, when there were more than 2,200 transactions. It took five years for the number of deals to surpass that earlier peak, and the dollar amount has never come close to recapturing the dot-com era’s glory. Internet Bust While the latest recession was the worst economic slump since the Great Depression, it actually wasn’t as devastating to California deal-making as the dot-com collapse. After having easy access to venture money and initial public offerings in the late-1990s and 2000, money dried up. The M&A industry hit bottom in 2002, when just 1,505 transactions accounted for $95.3 billion. The deals crept back up over the next four years, peaking again in 2006 and early 2007. There were 665 in the first quarter of 2007, valued at $59.8 billion. That’s more than three times the number reported last quarter. Tor Braham , head of technology mergers and acquisitions for Deutsche Bank AG in San Francisco, says mergers are ready to surge again for two reasons. Pressure’s On? “Private-equity funds have raised a lot of money before the financial crisis and there’s pressure on them to spend it before those commitments expire,” he said. Also: “Sellers want to get their deals done this year, before the expected increase in capital gains tax rate.” Private-equity firms raised $538 billion in 2006 and $587 billion in 2007, just before the recession, according to the Private Equity Council in Washington. Capital-gains taxes, meanwhile, could rise above 20 percent for people earning more than $250,000 under budget proposals before Congress. In the first quarter, Deutsche Bank advised Techwell Inc. in its $370 million takeover by Intersil Corp. The bank also worked with Nimsoft Inc. in its $350 million acquisition by CA Inc., and Francisco Partners on its sale of Numonyx BV to Micron Technology Inc. for about $1.3 billion. Even as mergers pick up, it may take until next year to get back to 2007 levels, Braham says. “Mergers-and-acquisition activity in the technology industry was very quiet in the first quarter,” he said. Matt Murphy , a partner at Kleiner Perkins Caufield & Byers in Menlo Park, is more bullish. The number of acquisitions this year will be close to the 2007 level, he says. “It feels like there is pent-up demand.” Mobile technology is one area where the big companies want to bulk up, leading to more acquisitions, Murphy says. “M&A is definitely picking up,” he said. “This is going to be a big year.” To contact the reporters on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net ; Serena Saitto in New York at ssaitto@bloomberg.net ; Tim Mullaney in New York at tmullaney1@bloomberg.net
