Exit strategy – it’s a good time to sell a tech company

You might think with all the doom and gloom out there about the subprime lending crisis, and the crash in real estate values, that it wouldn’t be a good time to sell a technology company. Well, it turns out that this a very good time. Macroscopic economic problems have affected overall M&A activity – it is down 51% this year compared to last. But tech company M&A is up 132%.

In a May 2008 article in Mergers & Acquisitions, Tom Stein said: “2007 will be hailed as the biggest year for acquisitions of venture-backed technology since the dot.com days.” Acquisition is now the most important way big companies grow, and they often spend more on acquisitions than R&D. This year, even Microsoft plans to spend more on acquiring than doing in-house R&D. Part of the reason big companies are buying early-stage tech companies is to try and recapture the entrepreneurial spirit and excitement that almost always gets lost in a big company.

That’s a big part of the reason Yahoo bought Flickr. Another reason this is a good time to sell is that big companies have lots of cash – so much that it’s actually a problem for company management. They can’t find ways to invest it fast enough to keep their shareholders happy. Last summer, a partner and I finished up a very successful exit for one of our portfolio companies, Parasun. That process left me with no doubt that the market to sell tech companies is hot. The bidding was very active and we ended up selling the company for about 50% more than the board planned less than two years earlier.

Another great example is the announcement of the acquisition of Hostopia on June 19, 2008. This Toronto based hosting company was trading around $5.00 per share just prior to the acquisitions announcement at $10.55 per share – double what it was trading at. If you have ever thought about selling your tech company, this looks like a very good time.