Troubles at two major Wall Street securities firms on Monday will have ripple effects that could stifle mergers and acquisitions in the technology industry and further dampen the market for initial public offerings.
Or so say financial pundits who are examining the potential fallout of Lehman Brothers' bankruptcy and the $50bn (£28bn) sale of Merrill Lynch to Bank of America in order to avoid its own financial crisis. Venture capital and finance experts compared the news to the late 1990s when the Big Eight accounting firms shrunk to the Big Four. Consolidation and financial uncertainty at the nation's largest securities firms will close some doors to tech companies aiming to go public, slow the process for M&A deals, and generally add more worry lines to tech investing.
"There's just a lot more uncertainty around getting mergers and acquisitions done that are really the life blood of tech financing," said Colin Blaydon, director of the Tuck Private Equity and Entrepreneurship Center at Dartmouth University.
The changes on Wall Street caused the worst investor sell-off in seven years. On Monday, the Dow Jones industrial average dropped by more than 500 points (a 4.4 percent drop), its biggest decline since the terrorist attacks of 9/11. The Nasdaq composite index fell by more than 80 points for a 3.6 percent decline.
2008 has already been a tumultuous year in the securities market because of ongoing effects from the mortgage credit crisis. But specific to the tech industry, investors say the market is being squeezed by fewer opportunities for exits from public offerings and buyout deals. Large tech companies are also taking a more cautious approach to M&A, and that's causing valuations to fall. Now, with fewer healthy investment banks, which handle about three quarters of the country's venture-backed exits, it will be harder to ink a deal.
"An oligopoly is not the best thing for the American capital system. When you have so few investment firms out there, it makes it difficult to get a deal at the end of the day," said Mark Heesen, president of the trade group National Venture Capital Association.
There's a lot more uncertainty around getting mergers and acquisitions done that are really the life blood of tech financing
Colin Blaydon, Dartmouth University
Heeson said he's particularly concerned about the likelihood of fewer quality acquisitions. In the last eight years of acquisitions, he said, there have been about 350 acquisitions every year. (Right after the tech bubble, those numbers held up mostly because of fire sales.) But now, those figures are dropping. In 2007, the NVCA reported 355 venture-backed mergers and acquisitions. In the first half of this year, however, it has counted 120.
"Cisco, Intel, let's say they bought 15 companies last year. This year, they may only buy eight. That's impacted by the stock market because they have less money to invest," Heeson said. "When a VC invests in a tech the ultimate goal is for that company to go public or get acquired. What happened today in a very unsettled market is it will now be even harder to go public than it has been. That will affect small tech companies for at least the next six months."
Early stage venture deals shouldn't be altered by Monday's events, however. There are still a lot of...
