Got cash? Let the bidding wars begin
Apple, Google and Microsoft are flush with cash and could go on a shopping spree for startups at the upcoming entrepreneurial gathering.
(Fortune) -- It's time again for DEMO, that bi-annual entrepreneurial beauty contest where hungry startups by the dozens parade their latest creations before a who's who of Silicon Valley money men. This winter's gathering is being held at the end of January in a Marriott resort a few miles south of Palm Springs, Calif. As I write this, it is expected to draw a record number of corporate bidders. "A lot of little companies are going to be picked up in some real sweet deals," says Chris Shipley, DEMO executive producer. "We're going to see a lot of activity."
She may be right. And it's not just DEMO participants that could be primed for lucrative takeover offers in 2008. Buyouts have always been the primary exit strategy for high-tech startups - even before the IPO market dried up - and the tech giants that can make them happen seem to have both the wherewithal and the appetite. Microsoft's Steve Ballmer has already said he plans to buy 20 companies a year for the next half-decade. Google, which never saw a cool new idea it didn't love, has snapped up almost three dozen companies in the past three years and has billions left to spend. Even Apple's Steve Jobs, a notorious tightwad, is under pressure to do something with the $15 billion war chest he's accumulated.
With that in mind, we picked the brains of our favorite analysts, touched base with a few Valley wise men, threw in a dash of guesswork, and came up with a shopping list for the three tech power players with the most cash sitting in the bank.
Bill Gates and Steve Ballmer are not known as free spenders, but Microsoft (MSFT, Fortune 500) has never been shy about paying for outside talent when it makes strategic sense. (Witness its $240 million investment in Facebook last year.) In fact, it has gobbled up more than a half-dozen companies every year since 2004.
One area in which the company might do well to invest is financial-planning software, where its offering - Microsoft Money - has never managed to catch up to Intuit's market-leading Quicken. The new trend is to replace big shrink-wrapped packages with small web-based applications that reside online. And there are several competitors chasing this growing market, including Geezeo, Wesabe, and Yodlee. But the one getting the most buzz is Mint.com; it was named startup of the year at a tech conference last fall. The brainchild of CEO Aaron Patzer, Mint gives its software away and makes its money referring members to banks, credit card companies, and soon brokerage houses that can offer users better rates than they're getting now. Mint has picked up 100,000 members in less than six months - members who could help Microsoft blunt Google's push in online documents and spreadsheets.
Another company that could assist Microsoft in fending off Google is Yelp. Yelp is the most popular of a new generation of web-based Zagat-type services that invite users to rate local businesses. (For more on Yelp: Business paradigm shifts and free tequila shots) It started with restaurants and hair salons but has been expanding to almost any type of service, from dentists to handymen. Yelp's momentum is impressive - it draws about two million visitors per month, according to Nielsen Online - and its users are particularly engaged. For example, Yelp carries 164 reviews of the popular Amber India restaurant in Google's hometown of Mountain View, Calif.; Google's local search, by contrast, offers just 39. And location-based information sites will only grow in value as more people rely on GPS devices to find goods on the go.
Steve Jobs is almost aggressively unacquisitive. While Apple (AAPL, Fortune 500) occasionally buys some innovative software or hardware from a startup, there's no record of his buying any companies outright since 2002. But here's a bet that could polish his company's image: Green Plug, an outfit that promises to save energy while solving the perennial problem of the power adapter. Green Plug's computer-on-a-chip technology adjusts to whatever device it's connected to, allowing a single power cord to charge, say, a MacBook, an iPod, and an iPhone. If Apple were to adopt this new plug system - as it did earlier with FireWire and USB - and it caught on as an industry standard, we wouldn't have to throw out our old transformers whenever we buy a new electronic toy.
Apple might also take a look at Move Networks, a company whose technology has become Hollywood's favorite way to stream and manage high-definition content. Apple is moving aggressively to expand its digital video offerings on the iTunes Store, and although it already controls several leading video standards through its family of QuickTime products, Move's system would allow it to take several important steps forward. Not only does Move deliver high-quality video faster, but it also offers content publishers a way to keep track of how many viewers are watching and for how long - something that will be necessary if anybody is going to make money putting digital video online.
With 8,000 employees spending 20% of their time on pet projects (one of the reasons they are the best company to work for), you might think that Google (GOOG, Fortune 500) had enough in-house talent to create whatever new products it needed. But that doesn't mean there aren't companies doing the same things Google does and doing them better. Case in point: Earthmine, a Berkeley-based startup whose 3-D urban maps put Google's Street View application to shame. Using vehicle-mounted cameras and data-generation algorithms developed by JPL for the Mars rovers, Earthmine creates immersive panoramic images so precise they can be used to accurately measure the height and width of buildings. Founders Anthony Fassero and John Ristevski have launched an ambitious project to map the 50 largest U.S. cities within the next 18 months, and although Caltech (which runs JPL) has an equity position in the company, Google can certainly afford to buy it out.
With a market cap that has dwindled to less than $1 billion, TiVo is another company the Google boys could easily afford to buy - one that might fit well into their plans to expand their dominion over online search and advertising into television. Though TiVo became a household name by giving users unprecedented control over live TV - most notoriously by allowing them to skip all the commercials - the company has matured into an interesting advertising player. It is now a clearinghouse of valuable data about what programs and ads its subscribers love (and hate) the most. This shift in focus has transformed TiVo from TV industry pariah into a valued partner. NBC, Starcom (a leading media agency), and Carat (a media buyer) have all become customers for TiVo's audience research. TiVo's data could marry well with Google's powerful advertising-delivery infrastructure. "Google is definitely going to replicate its success in ad-serving technology for other media," says Sandeep Aggarwal, an analyst with Oppenheimer & Co., "and a set-top box is one of the more viable methods of serving ads on TV."