By Eliot Brown
In late 2015, a commuter-shuttle startup caught the attention of
Ford Motor Co. executive John Casesa, who runs global strategy for
the auto maker. The startup, called Chariot, was growing fast and
had an interesting crowdsourced reservation model, a staffer told
him, suggesting a meeting.
One year and a $65 million deal later, the San Francisco van
service is owned by the Detroit giant -- part of an
acquisition-fueled push into new areas as an uncertain and perhaps
driverless future looms.
"We are in an era in our industry where M&A will be a
frequently used instrument," Mr. Casesa said.
For much of the past half-century, U.S. corporations in
industries from manufacturing to retail generally eschewed Silicon
Valley startups, instead choosing to build their own new products
or buy established companies.
But a combination of factors -- fear of seeing business
disrupted, struggles to find new growth, changes that require new
skills -- are leading more of these companies to hunt for tech
deals.
In recent months, a burst of old-line companies have swallowed
tech upstarts, including Wal-Mart Stores Inc.'s $3.3 billion
purchase of web-discount retailer Jet.com Inc., General Motors
Co.'s more than $1 billion acquisition of self-driving tech company
Cruise Automation and Unilever PLC's $1 billion purchase of online
razor seller Dollar Shave Club.
Nontech companies spent nearly $10 billion buying venture-backed
U.S. startups this year, nearly double the amount last year and the
highest total in at least five years, according to PitchBook.
Venture-capital investors and analysts expect a flurry of deals
in 2017, particularly given that funding is harder to come by in
the private and public markets.
Good software is "becoming the oxygen" for established
companies, said Barry Jaruzelski, a principal at
PricewaterhouseCoopers LLP who focuses on research and development
and technology. "People are saying, 'I need to acquire.' "
The result is that Silicon Valley conferences, networking events
and office buildings are gradually being infiltrated by the old
guard of retail, manufacturing, insurance and other traditional
sectors.
New venture-capital arms of large corporations seem to sprout up
every few months, enabling their executives to mingle and hunt for
partnerships and acquisitions. Entrants this year include Campbell
Soup Co., Kellogg Co., JetBlue Airways Corp. and Airbus Group SE,
the last two located in Silicon Valley.
Rich Wong, a partner at Accel Partners, an investor in Jet.com,
said that until recently potential buyers for startups were
generally confined to giants in the tech space, like Oracle Corp.
and Microsoft Corp. -- so much so that traditional companies in a
startup's sector didn't come up as candidates.
Accel Partners recently counseled the founders of its invested
startups to become more familiar with these older companies, an
apparent gesture to the disdain startup founders often express
about their corporate counterparts.
But these generally cautious corporate buyers face a dilemma:
Startups typically carry high valuations that are largely a product
of excitement around their growth potential. That makes them
extremely expensive based on traditional metrics like revenue --
and therefore inherently risky bets that can be tough for
shareholders to stomach.
Wal-Mart has a market capitalization about 65 times that of what
it paid for Jet.com, and it has roughly $480 billion in revenue
compared with what it said was $1 billion in annualized revenue for
Jet.com.
But Wal-Mart is facing ever-more competition from Amazon.com and
other retailers, and executives at the company have said Jet.com
will allow them to expand their e-commerce at a much faster
rate.
For these older companies buying startups, "generally speaking,
you are overpaying for assets right now," said Jason Gere, a
consumer-products analyst at KeyBanc Capital Markets. The deals
often are a bet on the future as they try to connect with a younger
generation, he said. "They're hoping that what they're doing is
creating another avenue for growth."
Another option is to write smaller checks, making earlier bets
on young companies like Ford did with Chariot in September.
Scotts Miracle-Gro Co., the 148-year-old lawn-products company
based outside Columbus, Ohio, wanted more tech-focused products and
gadgets to help with lawn care, but quickly realized it would have
to look outside its ranks for help, said Peter Supron, the
company's chief of staff.
"To the best of our knowledge, we don't have an electrical
engineer doing electrical engineering in the company," he said.
After charting out the lawn-care startup landscape and many
flights to Southern California -- where many are located -- Scotts
bought two startups this month. One, called Blossom, helps make a
digitally connected sprinkler system, and the other, PlantLink,
makes sensors that tell gardeners when to water. Both are small
acquisitions -- under $10 million, Mr. Supron said -- but they
saved Scotts the headache of building products on its own.
"These startups can get there faster and cheaper than us," he
said.
Write to Eliot Brown at eliot.brown@wsj.com
(END) Dow Jones Newswires
December 30, 2016 08:14 ET (13:14 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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