M&A Prospects for 2010

During the past two weeks I have attended two M&A and VC events and have the following to report about prospects for buy-side and sell-side activity, especially as regards small business.

1) While the prospects for selling a company to a large business worsened during the 2008-09 economic collapse, the number of deals and the outflow of cash remained fairly steady during Q2 and Q3 2009. This is good news and ought to encourage buyers that the worst is behind us and the time to move is now, when bargains can still be found.

2) For Venture Capital investments, the worst is definitely behind us. Activity bottomed out during Q1 2009, at 50% of the peak during Q1 2008, and immediately grew during Q2 and Q3 last year. Although stil below the 2008 peak this trend reveals confidence in the investor community in prospective companies and the markets they serve.

3) California (DefCon's backyard) provides the best hunting ground for new investment opportunities. During Q3 2009, depending on how you slice things, California startups received 54% of the VC dollars and 41% of the VC deals.

DefCon is working both financing and M&A deals with clients and expects to have some press releases regarding this activity fairly soon. Stay posted.

Good News and Bad News

Events in the past two weeks provide both good news and bad news regarding budget matters which are near and dear to DefCon's heart.

First, the good news. President Obama has asked for a record-high $708 billion in defense spending in 2011, plus an additional $33 billion for the war in Afghanistan, for a total of $741 billion. While the devil is in the details, there is no doubt the President believes that we live in a dangerous world and that our vigilance requires healthy defense and intelligence budgets. I know that many of my friends and colleagues are opposed to growing defense budgets; I caution them that I expect much of the growth to be focused on intelligence and intelligence systems, which are the most cost-effective way to protect Americans from the most vicious threats we face. It was the Bush Administration's huge investments in intel systems after 9-11 that have thwarted further terrorist incidents on American soil. These are the incidents you don't hear about because they never happened, because our preparedness or pre-emptive action thwarted them in infancy. We like the stories of heroic Westerners wrestling to the ground jerks like Richard Reid or Umar Farouk Abdulmutallab, but our investments in intelligenc thwart the incidents that never got this far.

Now, the bad news. President Obama appears likely to ax NASA's Constellation program, which was to return mankind to the moon by 2020. There will be no lunar landers, no moon bases, no newly-developed Ares V cargo rocket which would have become the workhorse for ferrying supplies, cargo and humans from earth to space.

The reason for the bad news? First and foremost, the administration has been hammered for its massive overspending in 2009 and is tightening its belt. It authorized $800 billion on "shovel-ready" projects, most of which was congressional pork, yet finds no room in the wallet for another $1-3 billion annually to underwrite NASA's moon effort. If the American people could vote on it, there is no doubt they would vote to fund space technology. Hands down.

The second reason is that the Obama Administration is still romantically involved with AGW (Anthropogenic Global Warming) and wants NASA to concentrate on Earth Science projects, specifically monitoring climate change. The case for AGW continues to unravel and I expect that this forcing function will become less and less relevant as each budget cycle passes.

Budget proposals are just that -- proposals, not fixed in concrete. We'll see what the budget negotiations produce.