The Market Minute: Why Startup Acquisitions Are On Fire

The public markets usually get all the attention when it comes to exits, but acquisitions of venture-backed companies have been rapid-fire this year, with 2021 set to outpace the previous three years.

So far this year, there have been 1,070 acquisitions of venture-backed companies with a reported total of $91.9 billion, according to Crunchbase data. We’re not even halfway through the year yet, but that puts us on pace to surpass 2018 (which saw 1,945 deals with a reported total of $129.9 billion), 2019 (1,946 deals with a reported total of $87.7 billion) and 2020 (1,692 deals with a reported total of $154.9 billion).

There are a few reasons for the surge in mergers and acquisitions, according to Natasha Allen, a partner at the law firm Foley & Lardner LLP who works in the firm’s venture capital, M&A and transactions practice. Capital is cheaper now, there are “pent up dollars” to spend, and perhaps most notably, the COVID-19 pandemic put a lot of deals on pause last year that are now coming back into play.

“COVID had a negative impact on a lot of companies … but there were some that were able to survive that,” Allen said. “So what I’ve been seeing is a lot of strategic acquisitions — a lot of companies acquiring smaller companies to speed up technologies they don’t want to develop in-house.”

The flurry of deals by SPACs, or special-purpose acquisition companies, this year has also pushed up valuations. That means companies looking to make acquisitions want to do it while things are still “relatively cheap,” according to Allen. Additionally, concerns over President Joe Biden’s proposed tax plan could have also spurred more deals to close before any changes to the tax regime kick in.

And the companies that have survived the last year have, in a way, proved their value and resilience.

“The technologies, too, have sustained over and beyond a pandemic,” Allen said. “As a company acquiring, you have more comfort that whatever you’re acquiring has more staying power.”

The largest acquisition of a venture-backed company so far this year was Hitachi’s $9.6 billion acquisition of San Jose-based digital product engineering company GlobalLogic. The second largest was Okta’s $6.5 billion acquisition of Bellevue, Washington-based identity management platform Auth0.

While M&A activity in the private sector appears to be busier than ever, it’s not quite the same in the public markets, according to Patrick Healey, founder and president of Caliber Financial Partners, a financial adviser firm. Putting aside SPAC deals, stock prices have been rising.

“As companies’ stock prices get pushed up higher and higher by forces in the market, you expect the level of acquisitions to be reduced,” Healey said. 

The pandemic accelerated the need for digital transformation, and now companies have a greater need to innovate through M&A, said Michael Torosian, a partner in the corporate practice of the law firm Baker Botts, who represents private companies and VC firms. And with so much capital in the market, there’s a lot of competition among buyers, while startups looking for an exit have more options on what path they want to pursue. 

Multiples have grown, which makes acquisitions more attractive for VC-backed companies, Torosian added.

“I see so much capital in the market, so much competition for deals, for a given venture-backed company, they have options they never had before,” Torosian said.

And the pace of acquisitions likely isn’t going to slow down before the end of the year. If acquisitions were to slow down, it would likely happen in early 2022, according to Allen. Usually companies on a typical transaction cycle want to finish deals by the end of the year for accounting and other purposes. 

“It’s an interesting time where you’re seeing so many different things come to fruition now,” she said.

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