Its not just the IPO market that's booming — here's why this Silicon Valley VC says 2018 will also be the year of M&As

In Silicon Valley, the big story for startups this year has been the boom in initial public offerings in the tech sector.
But Sandy Miller, general partner at venture-capital firm IVP, thinks a related market is likely to pick up steam in tandem with IPOs — that for mergers and acquisitions.
Indeed, the hot IPO market may spur more M&A activity, Miller said.
Bigger tech companies, private equity firms, and non-tech companies may all enter the market for startups.

This year is looking like it will be a big one for initial public offerings in the tech industry. But it could also see the start of a boom in a related market — that for mergers and acquisitions.

The tech giants are flush with cash. Executives have M&As on their minds. Some analysts believe one big acquisition could spur many more.

On top of all that, the hot market for IPOs could in turn lead to more M&A activity, said Sandy Miller, a general partner at venture-capital firm IVP, in a conversation with Business Insider. Miller thinks the M&A market will heat up this year and stay hot for the next two to three years.

"The M&A market and the IPO market tend to cycle together. They're not contrarian," Miller said. "The IPO market has been strong, and I think will continue to be strong."

He added: "What that tends to do is it raises the visibility of companies that big-tech acquirers might want to acquire."

More IPOs means more M&A

It's already an auspicious time for the M&A market.

Thanks to changes in the recent tax law, the biggest tech companies now have an estimated $470 billion in repatriated cash that they can use for a whole host of things. Many of them will likely use at least some of it to purchase other companies; some 57% of tech executives plan to pursue mergers and acquisitions in the next 12 months, a recent survey found.

Marc Benioff And Salesforce's proposed $6.5 billion acquisition of MuleSoft, could start a "domino effect" of M&A in the space, a financial analyst recently argued.

But Miller thinks the pick-up in the IPO market will give M&A activity a turbo boost.

With so many startups gearing up for IPOs, the market has become almost like a beauty pageant with larger corporations as the judges. The documents startups file to go public offer companies that are in the buying mood what's often their first detailed look at the startups' inner workings. And the tight timeline involved in an IPO forces potential acquirers to act quickly.

"They're tracking a lot of interesting private companies, and they need something to catalyze their moving forward to make an acquisition offer, and an IPO filing is a very good example of that," Miller said.

Miller noted the case of AppDynamics, which Cisco bought for $3.7 billion on the eve of the startup's IPO. Few companies are likely to wait until that late in the IPO process to buy a startup, Miller said. But other large companies will likely follow Cisco's lead and try to snap up startups between when they file to go IPO and before they actually debut.

Many startups these days choose to file confidentially, which means their financial documents aren't made public immediately, so potential acquirers can't see them. But just the process of preparing for an IPO puts those startups in a good position to accept an acquisition offer if it comes, Miller said, because they've already done the work to figure out what they are worth on the public markets.

Google and other tech giants have changed their corporate strategies

Another factor likely to boost M&A activity is a strategic shift made by some of the biggest and most acquisitive tech giants. Google, Amazon, and other behemoths have moved far beyond the core products that initially made them successful and have started thinking of themselves as conglomerates, Miller said.

"If you look at Google, Microsoft, Facebook, and Amazon, they all seem to want to be doing just about everything," he said.

When those companies enter new markets, they either have to develop products internally or acquire them. Often times they choose the latter path, Miller said.

Meanwhile, just the sheer number of valuable private tech companies around — a function of the startup baby boom of the early 2000s — could also help spur more mergers and acquisitions, Miller said.

"In the context of larger M&A transactions, there are just many more target companies than ever before, and that's just because there's been so many venture-backed companies born," he said.

New entrants are joining the tech M&A mix

One more factor could play into the booming M&A market: The entry of new groups of potential acquirers, including both companies from outside the tech industry and private equity firms.

It's become something of a cliché, but just about every company, no matter the sector, has to be a tech company these days. But many are scrambling to catch up.

cruise gm self-driving car In the past, big companies in industries such as automobiles didn't necessarily worry about employing top-tier software engineers. Now that they realize they need such workers, many are turning to acquisitions to acquire top talent, Miller said.

For their part, private equity firms have historically avoided making acquisitions in the tech industry in favor of lower-priced and underperforming companies in other sectors, Miller said. But many of these firms have begun to realize that investments in tech can provide big returns when managed well.

"They're in a very competitive environment with a lot of money available, so they're looking for alternative areas to invest in," Miller said.

Some private equity firms have had some success by adding tech companies to other assets they own to create a broader technology platform, he said.

"If they can add a product onto a platform, they can justify the economics of what they have to pay to acquire a successful venture-backed company," Miller said.

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