Eerily reminiscent of the late 1990s, technology companies again are hot commodities among investors and venture capitalists.
Capital IQ, a division of Standard & Poor’s division, recently reported that more than 450 merger-and-acquisition transactions involving U.S. information technology companies were booked in the second quarter, with a combined value of more than $14.7 billion.
Similarly, a new report from Infonetics Research pegs the value of the virtual private networks (VPNs) services market to grow to $29 billion by 2009.
And although M&A activity has been white hot in 2006, there still appears to be a great deal more venture capital on the sidelines, waiting to be invested.
Once again, investors and bankers are looking for the next big venture, hoping to climb aboard early on the next MySpace.com.
In the past year, Wall Street has seen plenty of examples of large investments in technology companies:
• Cisco Systems Inc. acquired Scientific-Atlanta Inc. for $6.9 billion.
• Alcatel SA recently announced a plan to acquire Lucent Technologies Inc. for $13.4 billion.
• Intergraph Corp., a provider of specialty software, recently said it agreed to be acquired by a group of private-equity investors group led by Hellman & Friedmand and Texas Pacific Group in a deal worth about $1.3 billion.
• News Corp. paid $580 million to acquire Intermix Media, the parent company of MySpace.com.
Over the past year, Wisconsin has not been immune from this sequel of technology investments:
• Waukesha-based RedPrairie Corp. was acquired by Francisco Partners, a $2.5 billion California-based technology investment firm. Since the transaction, RedPrairie has used its newfound venture capital to make acquisitions of several other technology companies.
• Spectrum Equity Investors, a Boston-based private equity firm, bought an $84 million majority state in Mortgagebot, a Cedarburg mortgage application technology provider that was spun off by Milwaukee’s Marshall & Ilsley Corp.
• Glendale-based Actuant Corp. recently paid $24 million to acquire Actown Electrocil Inc. of Spring Grove, Ill.
• Mason Wells Buyout Fund II, Limited Partnership, an affiliate of Mason Wells, a Milwaukee-based private equity firm, recently announced it will pay about $31 million to acquire Milwaukee-based Oilgear Co.
• NovaScan LLC of Milwaukee recently announced it has raised $285,000 in equity funding from angel investors and has another $100,000 is available to the company through grants and loans.
• Sussex-based Quad/Graphics Inc. has been growing by acquiring companies such as Openfirst in Milwaukee and Craftsman Press West in Reno, Nev.
This is not to say that those Wisconsin companies are not worthy of those investments or that those investors are being foolish with their money.
“Money is really cheap right now,” said Peter Rip, managing director with Leapfrog Ventures, a venture capital group based in Menlo Park, Calif. “There is a lot of money in the venture (capital) community. The money supply has gone up, and a big asset inflation results.”
Rip said the recent high price tags for Web 2.0-types of companies, such as MySpace, are happening because of the glut of money available and the demand for tech companies. Rip expects the prices for tech companies to eventually stall or deflate, rather than suddenly burst like they did in the first dot-com crash.
“A bubble and asset inflation lead to the same thing – prices go up,” Rip said. “It will create a collapse. But it doesn’t happen as profoundly as it did when the bubble burst. We won’t wake up one morning and say, ‘What the (explicative)ω’
“Prices will get bid up to the point where the expectations of hitting the lottery of a big payback come back to reality, a point at which (venture capitalists) say they don’t think they can get the venture rate of return, and they will stop paying this price,” Rip said.
David Hornik, a general partner with August Capital, another venture capital firm in Menlo Park, Calif., says investors are trying to be careful because they don’t want to repeat the mistakes of the first tech bubble.
“The primary thing that led to the huge inflation of the bubble and the equally huge pop was the over-inflated public market,” he said. “If the public market becomes open for vastly unprofitable companies, that’s a vastly dangerous sign.”
Milwaukee-area financial advisors and experts who deal in the technology industry do not believe the new bubble will suddenly burst.
“If the newspapers were full of IPOs and if venture capitalists were portrayed as rock ‘n roll stars and if kids want to be venture capitalists (there could be a bubble),” said Teresa Esser, managing director with Silicon Pastures Angel Investment Group, based in Milwaukee. “I don’t see any one technology CEO being a rock star right now. I think that’s a big part of it – everyone getting excited. It’s when all of the news stories are overwhelmingly positive, when CEOs are taking on a larger-than-life persona, those are the signs of craziness.”
Tech companies are not exhibiting the classic signs of stock market bubbles, said Michael Sadoff, investment manager with Sadoff Investment Management LLC, a Milwaukee-based investment firm.
“When you talk about bubbles, housing is bursting now and commodities are in a bubble,” Sadoff said. “I’m more concerned about the market as a whole. Technology (stocks) as a sub set of that has the potential to get hurt.”
It is especially important to follow traditional investment practices when looking at tech companies, said Tim Keane, director of the Golden Angels Network, because there is some delusion in the tech markets, particularly when it comes to value.
“I have yet to see a deal where someone paid a higher price and the time goes past, and I regret not getting in for a higher price,” Keane said. “The return issue is yet to be decided. Just because you’re out there and doing well doesn’t mean you can return money in a way that makes investors satisfied you’ve met their investment goals.”
Entrepreneurs in the software and tech markets who have received angel investments need to be concerned about overly optimistic valuations, Keane said.
“If you miss your goals, you might even lose your job,” he said. “That’s not to say a proper valuation will prevent that. But it will give you room to breathe.”
Most Milwaukee-area investors are not likely to get overly involved in technology investments yet, said Tim Muehler, a partner with the Milwaukee office of Clifton Gunderson.
“I don’t think there’s a lot of speculators willing to jump into high multiple, non-earning ventures without a good, solid story,” he said. “That’s what I’ve seen in the last couple of years.”
Esser agreed, saying Wisconsin investors would largely be sheltered from a potential tech bust because of their conservative nature.
“Our extreme frugality would insulate the investing community,” she said. “We provide capital if we get good value. We don’t get overwhelmed. We provide financing to people who have reasonable valuation expectations. That’s a big screening criteria.”
Victoria Fox, managing director with Emory & Co., a Milwaukee investment bank and mergers and acquisitions consulting firm, said investors aren’t going to open themselves up to the same mistakes from the first tech bust.
“People learned their lessons, and they’re looking for fundamentals to be there,” she said. “The IPOs have started to creep up again a little bit, although they’ve decreased in the last few years. A lot of them (previous tech companies) had their exit strategy through IPOs. That’s why so many people are gauging the success of Google, to see if it’s even viable.”
Many technology investment experts are welcoming the new technology bubble, provided it does not become overly inflated.
“Bubbles are great, they are what tell you the diver is still alive when down in the sea. Bubbles fill life,” said Bill Kleinbecker, senior consultant with Austin-based Technology Futures Inc. (TFI).
“The bubbles will keep coming, fizzing away and giving life to the economy,” said David Smith, vice president of consulting, alliances and education for TFI. “I don’t see the bubble as an ugly thing. One thing that is beginning to fuel bubbles is a concept called horizontal convergence.”
The digital convergence across horizontal industries using technology, including the cell phone, which now offers features including a camera, music player, Internet and calendar application, has allowed for the creation of new white space in the market and possibly the creation of new industries, Smith said.
Chris Shipley, executive producer of DEMO Conferences and co-founder of Las Vegas-based Guidewire Group, said, “Sure, we’ve seen some big M&A transactions, but that’s not happening across the board, and I think we’d have to see pre-money valuations skyrocket before we’re at risk of a true bubble. Mostly, I think business is reasonably strong along a natural economic cycle and that people are worried about bubbles will likely help everyone hold on to his collective senses.”
Guy Mascari, director of development for the Milwaukee County Research Park and the Technology Innovation Center (TIC) in Wauwatosa, said the companies at TIC are required to have a business plan when they apply to lease space.
“What happened with the dot-com (crash) was sort of technology for technology’s sake, and people were creating Web sites to do various things that did not have a whole lot of reality connected to them,” Mascari said.
Since its inception in 1993, the incubator has seen about 100 companies, and only one ended in “spectacular failure,” Mascari said.
