Local tech firms sold in feeding frenzy

Big spenders are on a high-tech shopping spree in the Sacramento region, snapping up some of the region's most promising technology firms.

As these local companies are swallowed up, the question arises: Is the recent flurry of mergers and acquisitions a good thing? The consensus from experts is: yes.

Some observers lament that the region's brightest stars are being gobbled up before they've had a chance to hit it big. But local technology experts say such activity indicates a healthy business ecosystem that could jump-start a host of new companies.

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"This really speaks well for the area," said Andrew Hargadon, director of the Center for Entrepreneurship at the UC Davis Graduate School of Management. "It shows that we are producing companies that are succeeding. And while no one should start a company with the hope of being bought out, it is a clear sign of success."

The latest indicator came Wednesday when longtime Sacramento video software innovator Serious Magic Inc. announced that it is being acquired by Bay Area software giant Adobe Systems Inc. for an undisclosed sum.

Besides Serious Magic, other high-profile deals this year include:

• Roseville chip design firm Sierra Logic Inc., which sold for $180 million.

• Publicly traded International DisplayWorks Inc. of Roseville, which went for $300 million.

• A majority stake in Rancho Cordova software company Hansen Information Technologies, which fetched more than $50 million.

The spending spree isn't expected to end anytime soon. In fact, Sacramento-based CoreLogic Systems, which makes software for the mortgage industry, is rumored to be near a deal sometime this quarter.

Not everyone is convinced that such buyouts are the best deal for the region's economy.

"We absolutely need more corporate headquarters here," said Al Gianini, a commercial real estate consultant and former executive director of the Sacramento Area Commerce and Trade Organization.

Compared with branch operations, Gianini said headquarters generally purchase more local goods and services, are more generous philanthropists and harbor more managerial and intellectual talent.

But others say the buyouts generate their own local benefits. Such deals generally mean an infusion of instant wealth to startup entrepreneurs and their investors. And that encourages them to seed a spate of new companies with both money and expertise, said Jack Crawford Jr., who manages the Velocity Venture Capital fund in Folsom.

"The odds of these entrepreneurs starting new companies is very high," Crawford said. "Success begets success."

Such is the case with Jim Schraith, a former Compaq Computer executive who moved to El Dorado Hills in 1998 to run ShareWave Inc.

After that company was sold in 2001, Schraith began investing in other firms, including Sierra Logic. While not disclosing his profit on the Sierra sale, Schraith said he's already earmarked some of his gain for several local startup companies.

Schraith and other experts attribute the recent surge in buyouts to a number of converging events.

First, many large firms are awash in capital and eager to expand through acquisitions.

Second, venture capital firms and other investors have had their money tied up in local companies for about five years and are eager to cash out.

Third, the market for new stock offerings is relatively weak. That means an initial public offering -- while potentially more lucrative than a buyout -- is also riskier.

Finally, new regulatory burdens of forming and running a public company make IPOs more costly and less attractive, one local expert said.

Gilles Attia, a Sacramento attorney who works with high-tech companies, estimates it's about twice as expensive to take a company public as it was six or seven years ago.

All those conditions make it much more likely that a successful startup will be acquired rather than stay independent.

And that's not necessarily bad. Beyond enriching investors and entrepreneurs, acquisitions have other benefits. The acquiring company often has the financial muscle to pay higher salaries to employees and to expand operations beyond the original company's reach, Schraith said.

Indeed, most of the five companies that were sold this year intend to maintain, if not expand, their operations here.

For instance, tapping into its $50 million from Golden Gate Capital, Hansen Information Technologies has brought aboard 50 new employees -- 40 of them from its purchase of a San Francisco software company.

Despite the dimming luster locally of such tech industry icons as Intel Corp., Apple Computer and Hewlett-Packard Co., the region is technologically more fertile than any time in the past, said Nicole Woolsey Biggart, dean of the UC Davis Graduate School of Management.

"We have finally developed the business services, the intellectual property lawyers, the seed funding. It's not on a grand scale, but it's more than adequate for starting and nurturing companies," she said. "If we look back 10 years, none of that was true."

But concerns that the recent spate of acquisitions could hinder homegrown companies from maturing into corporate giants may be unwarranted.

When companies consider moving to the Sacramento region, they never ask how many corporate headquarters or Fortune 500 companies are located here, said Barbara Hayes, SACTO's current executive director.

"Cities that have them tout them. But it's never been a determining issue for any of our clients," she said.

"Having a headquarters is definitely a prestige issue," Schraith added. "We sit around and say 'Wouldn't it be nice if we had a Yahoo or a Cisco here?' ... and someday we might.

"But I've lived in cities with Fortune 500 companies," he said, "and I can't say there's a big difference between there and here."

About the writer:

• The Bee's Clint Swett can be reached at (916) 321-1976 or cswett@sacbee.com.