M&A data offers clues for area entrepreneurs

If greater Washington wants to be more like Silicon Valley, perhaps something has to change about the way companies are bought and sold here.

At least that’s the conclusion of Jonathan Aberman, the managing director of McLean-based Amplifier Ventures. He recently made a comparison of merger and acquisition data from the two regions dating back to 2006.

His finding: Silicon Valley upstarts are more likely to be bought by companies there than Washington area upstarts are to be bought by companies here. That allows the California tech hub to remain more insulated and self-reliant.

“People want to duplicate Silicon Valley, and they focus on structure and they focus on culture, and what I realized ... was no one had really delved into this and asked if there was another reason for Silicon Valley’s success that you can use to drive activity in other parts of the country,” Aberman said.

His analysis found there were 1,877 technology-related mergers and acquisitions in greater Washington between 2006 and 2011. In 695 of those deals, or 37 percent, the acquirer was also based in the region. (Aberman defines greater Washington as the District and all of Maryland and Virginia.)

That compares to about 45 percent in Silicon Valley. There were 2,775 technology-related deals there during that five-year period, 1,244 of which involved an acquirer who was also based in Silicon Valley, according to the report.

The figures were compiled using multiple public and private databases and the help of an MBA student at the University of Maryland, Aberman said.

Aberman described the role of proximity in deal-making as being two-fold: awareness and integration. Companies are more likely to know about nearby firms, and once they’ve decided to buy, it’s easier to work local employees into the company hierarchy.

“It’s a lot easier to do an M&A deal and integrate a company when the people don’t have to move across the country or you don’t have to manage them across the country,” said Aberman, a former M&A lawyer. “M&A isn’t about buying a business; M&A is about successfully integrating it.”

Aberman added that the report’s more telling statistic may be the diversity of vibrant industries here compared to Silicon Valley. In Silicon Valley, 64 percent of M&A deals fell under “high technology,” a category that includes a broad swath of industries, such as biotechnology, software and semiconductors.

Meanwhile, the distribution of M&A activity in the greater Washington region was broader, with the high technology, financials, and media and entertainment categories showing a substantive number of deals.

Aberman said that means entrepreneurs here should pursue a wider array of businesses, rather than just the social media and Internet companies that have come to dominate Silicon Valley.

“We should really look at whether there are other vertical segments that we should be encouraging our entrepreneurs to start businesses in,” he said.

Acquiring talent, not companies

John Backus, managing partner at Reston-based New Atlantic Ventures, thinks many of the intra-market deals are talent-based acquisitions, which tend to be smaller in size and mean one firm essentially buys the staff of another. The report does not include the dollar figure attached to the deals, and such information is often not disclosed.

Those smaller deals can often provide a sizeable payout for the entrepreneur who started the company, Backus said, but there is little benefit to the region from an economic development perspective.

“We need as a region to stop thinking about trying to build a company for another company to buy,” Backus said. “We need to start thinking about building companies that are going to challenge the incumbents and beat the incumbents.

“You don’t really take a regional economy to the next level just by the big companies acquiring the little companies. You do it by injecting complete new blood into the region,” he added.

Both Aberman and Backus agreed that the local economy could benefit from the region’s established players, such as Northrop Grumman, energy giant AES or Hilton Worldwide, mixing with young up-and-comers. Today the groups typically attend separate industry events and conduct business in different ways.

But there is opportunity: As federal spending slows, Aberman predicts many of the firms that rely heavily on government contracts will look to other sources of income.

“Generally when businesses face erosion of revenue, they need to buy revenue and they need to buy innovation,” Aberman said.

“I believe that there is a likelihood over the next two years if we get the entrepreneurs and the larger companies more engaged with each other, we could create a much larger push-pull system,” he said.

The Northern Virginia Technology Council has organized occasional events in the past where its larger members, which include many of the top federal contractors, mix with smaller firms in the area.

“There’s so many small companies in this region ... There’s no way that the large companies are going to know there is X or Y company that is working on a product that would be perfect for my next contract,” said Kristin D’Amore, director of NVTC’s Entrepreneur Center.

Similarly, many of the smaller firms that participate in its programs want to build companies in hot sectors, such as health care or cybersecurity, but often don’t see how those technologies can be used by the government and commercial sectors alike.

“They’re either focused on the government space or they’re focused on the commercial space, and they don’t see there can be applications for both,” D’Amore said. “There are ways we can foster that a little bit more as entrepreneurs are coming to us with ideas.”

overlys@washpost.com

Industry Silicon Valley Greater Washington Region
Financials 240 369
Healthcare 308 232
High Technology 1,768 687
Industrials 137 217
Media & Entertainment 210 244
Telecommunications 112 128
Grand Total 2,775 1,877

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