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.
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.
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.
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.
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.