“SD company is the hunter, not the hunted,” tweeted San Diego Venture Group on May 28 after Volcano Corp. acquired Atheromed, pointing out what seemed to be a role reversal with a San Diego company doing the acquiring.
It’s a common thought, brought up by leaders in numerous panels, and the topic of high-level discussions about the city's future: What does it mean that San Diego has an endless supply of small- to medium-size companies ripe for acquisition, yet only a handful of billion-dollar giants capable of handling the acquiring?
There are two trains of thought on that question -- but is the core of the statement even true? Is San Diego always the hunted, never the hunter? The answer is no.
In a list of all mergers and acquisitions in 2013 where at least one party -- target or buyer -- lists a San Diego headquarters as its address, more than half of the 294 total transactions involved a San Diego company acquiring a non-San Diego company, with an additional handful of San Diego companies merging or acquiring other local companies.
A total of 126 San Diego companies were targeted, 137 did the acquiring and in 31 cases a San Diego company bought or merged with another local company.
Interestingly, of the deals disclosing the financial valuation of the merger or acquisition, the smaller number of San Diego-targeted deals totaled $12.15 billion, while the higher quantity of deals with a San Diego buying company totaled $6.8 billion in value.
Not all deals in the data from Connect’s S&P Capital IQ report disclosed the financial terms.
Why the discrepancy between common knowledge and actuality in terms of the acquirer-acquiree conundrum? There may be some valid reasons for that gap. For starters, real estate acquisitions are accounted for in the data, which may not be what people typically think of when talking M&A activity.
Secondly, if the deals are broken down by sector, many acquiring companies are in the biotech or health spaces -- there is relatively little activity in what Blair Giesen, founder of Zambig.com and a tech contributor to Voice of San Diego, called the "new tech" area of software and app companies.
The report breaks down the deals by sector, with 91 in the financials space, 55 in healthcare, 48 in information technology, 38 in the consumer discretionary bracket and remaining deals spread across several other sectors.
Of the 10 most active investors or buyers based on number of transactions, only two were not San Diego-based companies, and one of those, Isles Ranch Partners LLC, is out of the not-too-distant Newport Beach.
The most active buyers were Excel Trust, Inc. and Retail Opportunity Investments Corp. (Nasdaq: ROIC) with eight transactions each, followed by Minneapolis’ Castlelake L.P. with five, EDF Renewable Energy with five, Isles Ranch Partners with five, BioMed Realty Trust (NYSE: BMR), Davidson Communities and Realty Income Corp. (NYSE: O) with four each, and Capstone Advisors and Encore Capital Group (Nasdaq: ECPG) each with three transactions.
Also contributing to the misperception is that even the San Diego acquiring companies aren’t mammoths, and are capable of being acquired themselves -- Life Technologies is the perfect example, because it acquired several smaller startups but then was eventually consumed by Thermo Fisher Scientific (NYSE: TMO) for roughly $14 billion.
So still, only a handful of companies are in the extremely large, stable stage -- Qualcomm (Nasdaq: QCOM), WD-40 (Nasdaq: WDFC), General Atomics, Jack in the Box (Nasdaq: JACK), Solar Turbines and perhaps a few others, depending on where one draws the line.
But is that a problem? Some thought leaders say yes, some say no.
“I worried a lot about it, but it turns out that having talent here is more important,” said Rep. Scott Peters, D-Calif., at a Connect event in May.
He said the story of BP (NYSE: BP), which has a biofuels plant in his third district, is indicative of many other companies.
“I asked ‘Why is it this facility is here?’” Peters said. “They said, ‘We just couldn’t get people to move. This is where the science is, this is where the people are, this is where they want to stay, so for us this is the right place to be.’”
Peters said ensuring that San Diego focuses on bringing talented workers to the area and creating a place where they want to stay trumps a focus on developing billion-dollar companies because this talent pool will go on to form new companies, and do so locally.
Greg Lucier, former CEO of Life Technologies and now chairman of Sanford-Burnham’s Board of Trustees, agreed.
“I would build on Scott’s point, which is that ultimately, what determines the success of a region like San Diego is the ability to have the attraction of capital -- the ability to have a really good regulatory government support system that wants that capital to be attracted and a place where the smart people stick around and go on to form the next company and the next company -- that’s more important than creating billion-dollar companies,” Lucier said.
But not everyone is so sure that nothing is lost without a stronger presence of giants.
“The last significant technology-oriented company that grew into billions of dollars of sales and tens of thousands of employees was founded 30 years ago, and that was Qualcomm,” said Kevin Kinsella, founder of Avalon Ventures.
“There has not been a Qualcomm-sized success story since then -- companies get bought out or their product will be picked up, and it’s a nice gain for the founders, but I’d like to see the ecosystem expanded here in San Diego, and you really only make the ecosystem interesting when you have the opportunity to build the company as opposed to having it nipped in the bud and taken out kicking and screaming to Silicon Valley or Japan,” he added.
Aside from the physical relocation of the company -- and many times, its people -- and lost opportunities for expanding hubs in other areas aside from the existing telecom and biotech, another downside of not having a larger population of mammoth companies is the stability they bring to the job market.
Giesen said he has heard time and again that they provide a safety net of sorts for young talent wanting to work at a startup or even start their own company.
“I talked to someone coming into town who said he used to work for AOL, and when he left had a lot of opportunities,” Giesen said. “He was going to move to San Diego and work with a startup, but thought it was too risky because if that startup didn’t work, where would he go? That’s what everybody says — there are not a lot of options. Whereas in the Bay or Boulder or Seattle, you know if you lose a job at a startup, you can get a job at Microsoft or Boeing or a bunch of different companies -- here it’s Qualcomm.”
But Kinsella and Giesen agreed that San Diego has all the essential parts necessary to complete this feedback loop ecosystem with top talent at large companies staying in San Diego to spin out their own new companies, some of which may become large themselves, thus closing the loop.
Giesen said he sees three areas that need to be improved to make that a reality: more accelerator programs -- San Diego has many incubators but is lacking in accelerators, a startup or tech-focused news source similar to the Bay Area’s TechCrunch and a physical hub of startup activity, a gap that Makers Quarter downtown aims to fill.
“It’s like staring into a crystal ball, but I would say that there is no reason why that can’t take place, as long as the economy doesn’t fall back into recession,” Kinsella said. “All the conditions are here, we just need a little luck and a strike of lightning.”