- Venture capital investors say they expect a slowdown in merger and acquisition activity because of the looming coronavirus recession.
- Potential acquirers may focus on their own survival because they’re not sure how long the recession will last. Many could cut costs and scrap their acquisition plans.
- But it’s a buyer’s market as startup valuations drop, and some cash-rich companies are still shopping around.
- Visit Business Insider’s homepage for more stories.
Startups are looking for the exit doors in the midst of the Great Lockdown, as the initial public offering market has pretty much closed for technology companies.
However, venture capital investors say startups should brace for a decline in merger and acquisition activity, robbing them of the main alternative to an IPO.
We asked a panel of venture capitalists if they think mergers and acquisitions will be affected by the drastically changing market conditions. Of the 17 people who responded, 11 people said they think activity will slow in the second quarter.
Selling to a competitor, while often painful, affords a startup the funding to keep going, new customers, and an increase in market share — a potential lifeline in an economic crisis. A sale also provides liquidity to investors, which may be why Sequoia’s Doug Leone told startup leaders during the dot-com bust to “aggressively examine and pursue M&A opportunities” if cash is running out.
Now, the likelihood of a recession — and the uncertainty around how long it will last — has large potential acquirers cutting costs to ensure their survival.
Eight investors told Business Insider that merger and acquisition activity will “greatly slow” in the second quarter, and three people said it will “somewhat slow.” One person said activity will “stay about the same” in the second quarter as in the first quarter, which saw financial services startup Credit Karma sell to Intuit for $7.1 billion in cash and stock, amidst other big-ticket acquisitions.
Deals are already collapsing
The volley of unknowns has already spurred potential buyers to delay or cancel their plans to snap up other businesses.
Many erstwhile buyers are being forced to focus on the immediate health of their own operations. They may sacrifice some possible growth by scaling back their hiring and acquisition strategies in favor of burning less capital in the near term.
So far this year, Xerox has pulled the plug on its hostile bid to buy larger rival HP, saying that it was no longer sensible to pursue the takeover. A private equity firm is now trying to undo its purchase of Victoria’s Secret, after the lingerie brand closed its stores and temporarily laid off most of its retail workers.
SoftBank also rowed backwards on an offer to buy $3 billion worth of WeWork shares earlier this month, though the tech giant justified the move by citing “significant” civil and criminal investigations into WeWork, and not the economic crisis. WeWork’s board has sued its lost investor for reneging on the bailout, and the startup’s disgraced former chief executive officer, Adam Neumann, also intends to sue the megafund, according to Bloomberg.
The merger and acquisition market could dry up further.
On Thursday, the chairman of the US House antitrust committe proposed a temporary freeze on most merger and acquisition activity until the crisis ends, saying that a “period of rampant consolidation” could wipe out competition from smaller players, as reported by Axios. The proposal would, however, permit deals involving a company that’s already bankrupt or on the brink of failure.
The government has never passed such a sweeping moratorium on mergers and acquisitions, and the proposal is “highly unlikely” to have the support of Republicans on the panel, Politico reported.
‘It’s a buyer’s market’
The doomy M&A forecast wasn’t shared by everyone on our VC panel.
Five respondents said deal activity will “somewhat increase” in the second quarter, compared to the first quarter. No one thought it would “greatly increase.”
Other notable deals in the first quarter include Google’s acquisition of data-analytics startup Looker for $2.6 billion and Salesforce’s $1.33 billion pick-up of cloud-software startup Vlocity. The much younger acquirer Brex also went on a shopping spree, buying three companies at discount prices since the start of the coronavirus pandemic.
Henrique Dubugras, Brex’s 24-year-old cofounder and co-chief executive, told Business Insider in March that his business plans to keep buying startups.
“Because of the markets, there will be opportunities that weren’t possible before,” Dubugras said. “Valuations are correcting and many startups can’t raise [funds] right now, so they find it better to work together on things. We are in a position with a lot of cash and a strong business model, so we are in a position to help a lot of these companies.”
The cloud business, in particular, could see an explosion of deal activity, as Business Insider previously reported.
The shelter-in-place orders underline the advantages of running a network on a web-based application that’s accessible from anywhere, instead of a private, on-premise data center at company offices. These conditions could lead to a period of consolidation when the three most dominant players — Amazon, Microsoft, and Google — as well as other tech giants gunning for a greater piece of the market, could seize opportunities to expand by acquiring smaller players at very low prices.
David Blumberg, a venture capitalist who focuses on startups that sell to other businesses, said one of his portfolio companies recently bought a company without meeting the team in person. The terms of the deal allow the acquirer to pay nothing in the initial sale, while agreeing to give the purchased company all of its earnings on future sales if the business achieves certain financial goals, according to Blumberg.
“It’s a buyer’s market in that regard,” he told Business Insider.
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