Corporate Liquidity Pools

The conventional wisdom since the dot com meltdown at the turn of the century is that the IPO is effectively a nonstarter as an exit strategy, and that M&A is the most probable means for an early stage company convert equity into yield.  While this is not news, there are some new wrinkles in the current economic climate.

Eric Lundquist, on his ComputerWorld blog, examines the emergence of the large technology companies as an important source of liquidity during the current economic distress.  The most dominant companies in this space are laden with cash, and quietly going on a buying spree as other sources of cash dry up and valuations decline.

When I look at some of the investment areas including digital medical records, energy management, transportation and infrastructure, the big four (Oracle, Cisco,Microsoft, IBM -- MICO), okay big five if you include Hewlett-Packard, are not strong across all those areas and do not have enough time to build that expertise in-house.

This is exciting not only because of the potential for exits in a tough climate, but also becuase these acquisitions are strategic, strenthening the parent company, and creating new opportunities for innovative firms to emerge.

While the returns to investors may be less than hoped for, it does free up capital for investment in other promising companies, and frees up the founders to start new enterprises.