2008 Public Internet M&A: Year In Review
2008 will not be remembered as the "Year of the Deal" in the Internet sector. In fact, it is a year virtually all companies and investment bankers would prefer to forget.
There were a grand total of 9 public Internet companies acquired in 2008 and the largest of those deals, CBS's acquisition of CNET, was only $1.8 BN, hardly big enough to generate sufficient fees to keep Wallsteet's finest attired in bespoke suits.
The biggest news in the Internet M&A space was, of course, the deal that never happened: MIcrosoft's proposed offer to buy Yahoo!. In the wake of this failed engagement there may be some big deals in 2009 as both Microsoft and Yahoo pursue other options, but for now 2008 will go down as one of the quietest, perhaps the quietest, years for M&A in the Internet sector ever.
|4/16/08||Varsity Group||VSTY||Follett Group||$4|
For a complete list of public Internet M&A deals as well as some private deals see this list of Internet M&A deals.
2008 Software IPOs: Year in Review
While the Software sector did not fare as poorly as the Internet sector when it comes to IPOs in 2008, it did not do much better. In fact it did just 1 better; as in 1 IPO for all of 2008. This is obviously the smallest # of Software IPOs since we began compiling a list of them 5 years ago.
Who was the lucky winner? It was a security software company called ArcSight (ARST). ArcSight managed to get public on Valentines Day, 2/14/2008, at a price of $9.00/share. Things were looking grim for ARST in mid November with the stock trading close to $4/share, but they fortuitously reported a "beat and raise" quarter in early December and the stock rallied furiously. So much so that Arcsight closed the year at $8.01, off only 11% from its IPO price.
Other than Arcsight, the Software IPO space was a quiet as a country mouse and based on the paucity of recent S1 registrations it will be awhile before there are any more Software IPOs to speak of.
2008 Internet IPOs: Year in Review
This is going to be an easy review. That's because 2008 will likely go down as the first year in the modern "web" era of the Internet that there wasn't a single Internet related IPO in the major US stock markets. That's right, not a single one, zippo, nada. There were a few spin-offs and a couple cross listings but as for brand new spanking public Internet companies there wasn't a single one. It's enough to make a make a grown VC cry.
As it stands, the last IPO of an Internet focused company was arguably NetSuite, which went public on 12/20/08 at a price of $26/share and closed today at $8.44. And that 68% price decline, ladies and gentlemen, is all you need to know on why there hasn't been an Internet IPO since then.
That makes it 377 days without an Internet IPO. I modestly suggest that Sand Hill VCs should tie a ribbon made of $100 bills around a Redwood tree outside their offices until such time that the market stops holding their late stage deals hostage.
Granted there were only 30 IPOs in the entire market in 2008, but you'd think that what is supposedly one of the fastest growing, highest technology sectors in our economy would be able to contribute at least one good IPO. Oh well, maybe next year.
Madoff Madness: Seven Things You Might Not Know
When I was a Wall Street analyst I got to know Bernie Madoff by reputation because I covered the whole online/electronic trading industry and Madoff was a big actor in that space due to his market making operations and his constant fights with the NYSE.
Given this experience as well as the fact that I currently manage a hedge fund, I can’t resist making a couple of points that I don’t think have been widely discussed in the media so far:
- Madoff’s investment firm was not a hedge fund, it was what’s called a “managed accounts” business in which each investor had their own separate account that was supposedly managed by Madoff. That’s why press reports indicate the investor’s got statements that listed individual trades in their account (something you don’t get with a hedge fund). The reason why this is important is that, like many managed accounts, Madoff only charged a relatively small flat management fee (1.5% a year according to reports) compared to hedge funds which typically charge at least a 2% management fee plus 20% of the profits. This fee structure made Madoff’s fund very attractive to fund-of-funds because it made their “double fee, double carry” structure look a lot less onerous. If you are wondering why so many fund-of-funds bet the farm on Madoff’s fund, look no further than this.
- Madoff was not only the investment adviser to these managed accounts, he was also the broker, custodian, and administrator. This is a huge red flag that anyone with even a basic understanding of investment management should have noticed immediately. A firm structured like this is essentially a closed loop with almost no external checks and balances. Even an outside auditor would find it difficult to uncover fraud because there’s no independent entity to verify trades, assets, etc. It’s amazing that this kind of structure didn’t raise more alarm bells at places such as the SEC and the fund-of-funds.
- What makes this fraud truly genius is that everyone on the street, including I suspect most of his investors, assumed all along that Madoff was a crook, in fact that’s why they invested with him in the first place! The rumor was always that he made his money by front running the order flow from his market making business so if things didn’t add up people must have just figured, “Well of course they don’t add up, wink wink nudge nudge, because we all know this whole split strike strategy is just a lie to cover up the fact he is screwing his order flow customers”.
- The fund-of-fund managers who invested heavily in this fund should probably go to jail before Madoff. Not only did they invest in a firm with a operating structure that should have raised just about every due diligence red flag in the book, but it delivered amazing returns at fees that were “too good to be true”.
- It’s highly ironic that people are shocked a market maker would be doing something illegal. Market makers, including Madoff, conspired for years to rig spreads on the NASDAQ market before they were caught (by two professors, not the SEC!). To this day market makers continue to front run their customers on a massive scale (why else would they pay for order flow?). Why anyone would trust such firms with their investments is beyond me.
- Making the rather generous assumption that it didn’t start out as a fraud, it will be very interesting to learn just when and why the scheme crossed over from investment fund to ponzi scheme. I am guessing that the advent of decimalization plus electronic trading (both on the equity and options exchanges) plus the rapid expansion in funds under management took most of the juice out of the original model and ultimately led to the collapse of the fund’s strategy. If that’s the case it will be highly ironic that some of the market “improvements” that Madoff help champion ultimately undermined his firm.
- Finally, I am sure that the government will enact all kinds of new regulations as a result of this fraud but the truth is that this could all have been prevented if investors had insisted on the most basic of check and balances including an independent broker, an external custodian, a third party administrator, and a reputable auditor. These simple, common sense controls would have easily prevented this fraud from ever taking place.