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Venture-backed merger and acquisitions held steady in Q3

Software and IT services led all industry sectors

NEW YORK -- Venture-backed merger and acquisition activity remained stable in the third quarter of 2004 with 83 companies acquired, according to Thomson Venture Economics and the National Venture Capital Association.

Forty-three companies disclosed a combined value of $3.92 billion and the average deal valuation was $91.2 million for the quarter. While the average valuation was approximately 3 percent lower than the second quarter, it was 44 percent higher than the third quarter of 2003.

"The cornerstone of a strong exit market is sustainability," said Mark Heesen, president of the National Venture Capital Association. "The acquisition activity may fluctuate within a certain range but over time we are looking for a gradual increase in the number and value of the deals completed. We are seeing a healthier 2004 than 2003 both in the number and valuation of these companies. Much of this is because some of these companies established pre-2000 are now gaining some traction."

Year to date, 2004 has shown a 59.7 percent increase in total transaction value and a 12.7 percent rise in deal volume compared to the first three quarters of 2003. Further, an analysis of the relationship between transaction values and amounts invested by venture capitalists shows the improving strength of the market in 2004.

Over the first nine months of 2004, 42 out of 134 disclosed value deals reported transaction values at least four times greater than the amount invested. These exits are 31.1 percent of the total thus far in 2004, while over the same period of 2003 they represented only 20.2 percent of the activity. Those deals that returned values greater than 10 times the amount invested have been more prevalent this year as well, accounting for 13.4 percent of the disclosed value deals. During the first three quarters of 2003, they comprised only 4.5 percent.

Software targets had a strong third quarter, making up 39 percent of all deals, with 33 companies acquired. Of these, 17 disclosed a total value of $1.5 billion.

In the second quarter, 10 software companies out of 25 reported a combined value of $791.3 million. The strength of the software sector this quarter was anchored by three deals. Seisint was acquired by LexisNexis Group for $775 million; Matrics was bought by Symbol Technologies for $239 million; and Procket Networks sold to Cisco for $89 million. All three deals were in the top 10 for the quarter. The Seisint deal is also the largest of 2004 thus far.

IT services ranked second in the third quarter with five deals out of seven reporting $1.1 billion in transaction value. E-commerce services company Lynk Systems was acquired for $525 million by the Royal Bank of Scotland; and Lucent Technologies paid $295.7 million for Telica, a telecommunications equipment supplier.

An examination of funding histories reveals that 79 percent of the companies acquired in 2004 received their first round of venture financing prior to the technology bubble burst. Of the 18 companies that received greater than 10 times the venture investment this year, 11 were funded pre-bubble burst. These figures demonstrate availability of viable exit options for companies that survived the recession.

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