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The year-end tally of deal activity confirms the worst for some of Silicon Valley’s most prominent firms: Corporate work dropped off a cliff in 2001. At firms most identified with the buildup of the Internet bubble, initial public offerings plummeted 87 percent from the prior year. The firms handled just 22 IPOs in 2001 compared to 175 in 2000. And though mergers and acquisitions proved the saving grace for most of the firms’ corporate practices, that work suffered, too. The number of M&A deals slid 26 percent from 859 in 2000 to 638 in 2001. Along with recent disclosures of sliding partner profits and declining revenues at many firms, the IPO and M&A totals are the final depressing notes from a dismal year for Valley firms. And they represent a troubling business reality: The IPO — a pillar of corporate work at Valley firms — has virtually disappeared. Along with it, firms have lost what was once a reliable source of revenue. “Obviously, IPO and M&A activity was way down compared to prior years, and that certainly had an effect on overall work levels within the firm,” said Mark Tanoury, a partner at Palo Alto, Calif.-based Cooley Godward. Yet while M&A has slowed, it hasn’t suffered the same catastrophic decline as the initial public offering market. Part of the reason, partners say, lies in the scarcity of IPOs. Startups need to find a way to stay afloat, and sometimes the only way to do that is to merge. “There’s no question about the fact a fair amount of deal activity was driven by the absence of a viable IPO exit for venture-backed companies,” said Richard Climan, head of Cooley Godward’s M&A group. And there’s some light in all the gloom. Merger activity may be down from the tech-boom year of 2000, but it still outpaced activity in 1999 at seven Silicon Valley firms most identified with the tech boom. The firms include Cooley, Wilson Sonsini Goodrich & Rosati, Brobeck, Phleger & Harrison, Gray Cary Ware & Freidenrich, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, Venture Law Group and Fenwick & West. The firms closed 638 deals last year — still more than the 591 they did in 1999. “Overall M&A activity will decrease in less-than-robust economic times, [but] you will not see M&A activity fall off a cliff like IPOs,” said Michael Kennedy, a Wilson Sonsini partner. Overall, the 15 California firms with significant M&A practices suffered an 8 percent decline in M&A activity, closing 1,293 deals last year, compared to 1,400 in 2000. At the top of the list among firms statewide was Los Angeles’ Gibson, Dunn & Crutcher, which closed 233 deals in 2001. Brobeck landed in second place, with 201 deals. Latham & Watkins came in third place with 198 deals followed by Wilson in fourth place with 170 deals. The other active Valley firms are Gray Cary (90 deals), Cooley (69 deals), Fenwick (41 deals), VLG (33 deals) and Gunderson (34 deals). Two things were driving deal activity last year: venture capitalists looking at cashing out their investments through sales of companies and larger tech companies looking to add new products or research. “Research and development is done by startups and other smaller companies,” said Kennedy. “In effect, the industry is structured to have M&A as an endpoint for many companies.” Of course, not everyone was in a buying mood. Larger companies — like Cisco Systems Inc. — that had gone on buying sprees in prior years slowed down their pace dramatically. “There was a merger euphoria and just about anybody who had a valuable currency would grow its business by buying other companies,” Kennedy said. That’s just not the case anymore, he said. Tech industries bore the brunt of the country’s economic downturn and as a result, executives ignored the bargains and focused on shoring up their own companies in 2001, he said. “The price may be low,” Kennedy said, “but it still may not be valuable to you as a buyer.” And even when companies were willing to buy, the deals were smaller in value than those in prior years. “We did not see the gargantuan deals that we’d seen in prior years,” Climan said. “And as you might expect, there was a significant falloff in the aggregate dollar volume in deal activity.” Related chart: 2001 Mergers and Acquisitions Related chart: IPO Performance

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