The acquisition game
Austin Business Journal - by Amanda Bronstad Austin Business Journal Staff
In late December, Agere Inc. was preparing to close on $150 million in venture capital funding, the largest sum for any Austin semiconductor company in its second round of financing.
Agere turned it down.
Instead, the chip designer announced in January that it had opted to sell the business to Lucent Technologies Inc. for $415 million worth of shares. Less than a month later, Austin-based CyBerCorp Inc. followed suit by selling to Schwab Corp. for $488 million.
In a city prepared for record-setting initial public offerings in 2000, recent acquisition deals leave many in the business community wondering why some startups elect to sell the business instead of going through an initial public offering -- and why many more are expected to do the same this year.
"Never has so much money been available to companies like ours in my 20 years of being an entrepreneur," says Philip Berber, chairman of CyBerCorp. "From VCs, to IPOs, secondary offerings, private placements -- there's so much money available out there that it's very tempting to focus on the money. But if you find the right partner, you get so much more than money. You get brand marketing, promotion, customer service architecture -- you get an array of sources."
In the case of CyBerCorp -- an online brokerage business -- partnering with Schwab gave the company 6.6 million retail brokerage accounts, access to the institutional market and international ties, almost overnight.
For Agere, which develops a network processor, the Lucent arrangement instantly gave it a support infrastructure that would have taken two or three years to acquire. It also gives Agere, which hasn't yet sold its product, an already well-received product portfolio that packages its processor with a "line card," a set of components that run a communications network.
"If we had to go on our own, we would've had to acquire or merge [with other companies] to get the full solution for fiber and switches," says Agere President and CEO Ford Tamer. "On our own, it would've been more difficult because we'd have an Agere startup plus other startups trying to sell the [package]."
After less than two years in business, Agere's operations remain intact, with Tamer heading Lucent's network processor business, now part of the company's networks and communications strategic business unit, which was built through four other acquisitions.
Not only will Lucent's network processor business remain in Austin, but it recently expanded its square footage and expects to increase staff from its current 90 people, Tamer says.
But as seamless as the deal sounds, Tamer says it was not originally part of Agere's plan.
"We'd been talking to Lucent [about] partnerships since September," he says. "They surprised us by wanting to acquire us."
These days, many private companies are being approached with deals almost matching dollar-for-dollar what they can obtain through a public offering, says Jim Nolen, senior lecturer in the department of finance at the University of Texas' graduate school of business.
Some of those companies don't even have impressive balance sheets, he says. What's attractive to the buyers is the talented labor and immediate value inherent in buying a business segment, vs. developing one from the ground up.
That's what Lucent's Ed Roberts, to whom Tamer now reports, says attracted the New Jersey-based company to Agere.
"We're investing in a team," he says. "We're bringing [in] people who created the intellectual property. That's what we're getting. Now we can even move faster."
Intellectual property is what many large firms are buying when they acquire a startup company -- and most startup companies are well aware of that. In CyBerCorp's case, the company never even planned to go public.
For the past 12 months, Berber says he's been fighting the urge to go public in favor of finding the perfect partner to help CyBerCorp's business go farther, faster.
"The IPO process, in my view, is extremely inefficient and extremely ineffective in most cases," he says. "The pricing of an IPO is not set in the best interest of the shareholders. It's set in the best interests of investment bankers' institutional clients. And it's a `get rich quick' myth. For every Amazon.com or AOL, there were a multitude of newly issued IPOs that, after initial speculation, have had the value of their stock deflate significantly."
Berber says any company can find the perfect partner or partners if it is diligent in its search.
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