Does Silicon Valley’s Spending Spree Signal a Recovery?

Mergers and Finance

This week brought acquisitions of three high-profile technology startups, a welcome break in the gloom that has enveloped Silicon Valley for the past year.

On Monday, Google agreed to buy AdMob, a mobile advertising startup backed by Sequoia Capital and Accel Partners, for $750 million. Electronic Arts agreed to buy Playfish, an online games startup backed by Index Ventures and Accel Partners, for $300 million. On Tuesday, Logitech agreed to buy LifeSize, a videoconferencing startup backed by Redpoint Ventures, Austin Ventures and Norwest Venture Partners, for $405 million.

“There’s a lot of pent-up demand,” said Jeff Brody, a founding partner of Redpoint Ventures who is on the board of LifeSize.

The number and value of acquisitions of venture-backed startups in the third quarter fell below even the dismal second-quarter numbers, according to data released in October by the National Venture Capital Association. In the third quarter, 62 tech startups were sold for a total of $1.2 billion, down from 64 companies sold for $2.6 billion in the second quarter. In healthier times, 100 startups might be sold for $5 billion in a typical quarter.

The improving economy has forced acquiring companies to increase their offers, Mr. Brody said. When the stock market is in a better position, and when potential buyers know that startups have alternate options, prices go up. “Until there’s a viable alternative, not many acquirers come to the table with a viable offer,” he said.

Startups, which typically get purchased or go public after five to seven years, have been languishing in venture capitalists’ portfolios for much longer. LifeSize, for instance, had grown to the point that it could have been sold two years ago, Mr. Brody said, but potential acquirers were not offering the right price.

This week’s spending spree could signal the beginning of a recovery. “The I.P.O. window was shut and most M&A interest was bottom fishing; there were lots of guys interested in picking up companies for cheap,” he said. “As the I.P.O. market has started to come back and as public company stocks have recovered, we have seen a surge in M&A interest and prices.”