Fifteen years ago, when a big tech company wanted to acquire a smaller company, they bought the whole company. According to Mergerstat, the median M&A was over $100M in 1999.

M&A has suffered since the dotcom boom, particularly in more recent years. Since 2008, the number of deals and the average price per deal have both steadily dropped.

02_Volume_deal_size_2010

In 2013, Mergerstat now reports the median price of private company acquisitions under $25 million. And that is an optimistic number. Most small deals are not announced, and price is not usually disclosed in smaller transactions, so the real average is likely to be under $20 million.

What happened?

A liquid patent transaction market unquestionably affected this drop, along with other factors. I will provide more depth to this evolution in Part 2, but for now, kindly allow me share a little story (true, albeit with confidences protected) to provide some color.

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Back in 2009, a Senior Director from Business Development at BigCo X called StartUp Y and basically said “We would like to acquire you.” After numerous diligence calls, negotiations, and eight weeks of back and forth, BigCo X offered to buy StartUp Y for $50M. BigCo X is an F100 high tech company, they do a handful of acquisitions every year, and so everything looked rosy for the StartUp.

StartUp Y did what every StartUp does at this point: 1) partied, and 2) went looking for a better offer. There were only two other major companies in this particular tech space that would be interested in the little company at a price tag north of $10M, let alone $50M, so the number of alternate buyers was notably limited. Much to the surprise of the StartUp CEO, a valiant first timer, the other two potential suitors said ‘No thanks’ at $50M, and promptly.

Here is where I come in. I call StartUp Y and say “I have a Buyer for your patent!” StartUp Y naturally asked me for $60M for the patent. I offered $500K, and backed up my offer with patent transaction data that was much lower than that. StartUp Y then went back to BigCo X and claimed that they were having acquisition discussions with someone else (me), and immediately tried to use me as leverage in their acquisition discussions.

How did I know all of this? BigCo X told me. You see, I was contracted as an anonymous patent buyer for BigCo X the whole time. We talked daily.

Two weeks after I offered $500K for the patent, BigCo X withdrew the acquisition offer. Surprise! The M&A offer was a set up to scare away any other interested parties, and to learn financial details on StartUp Y.

I thus knew that StartUp Y was having funding trouble; they could not raise a new round, and their lead VC was already extending financing to the team just to keep the team intact in hope of the M&A.

We also learned that there was a bank lien on the company and all patents of $350K. Most VCs want to preserve their banking relationships, which persist over the life of their fund, so the lead VC (who had control) was willing to sell at $500K after learning that the M&A suitors were all gone.

You can do the math as to how this turned out: we bought the patent, using a shell company of course.

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Was this a freak event? A rare trick played by BigCo X? Hell no. This happened at least fifteen times for BigCo X – in 2009 alone. We used a similar play book each time. Many times, the little fish got away, but rarely without BigCo X polluting the acquisition waters. While I no longer operate on behalf of BigCo X, I see countless similar plays every year, for dozens and dozens of the F500.

Founders and VCs will frown on these aggressive tactics. But rationale consumer behavior begs the question: why should any big company buy a StartUp at an inflated price when they can get its desired pieces a la carte for a fraction of the price?

Patents are one piece in an acquisition. I discuss the others in Part 2.