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Our company is looking at an IPO." The words took on the quality of a mantra during the early years of the Internet Economy. The IPO was the pot of gold at the end of the rainbow. The watershed dividing wannabes from winners.

Today the window for high-tech IPOs is shrinking. While a few highfliers make the papers, the majority of companies that pulled off IPOs in 1995 and 1996 are performing miserably in the stock market.

In contrast, 1998 was a record year for mergers and acquisitions in the high-tech industry. Intense competition and industry maturation has led to fewer but bigger players. Industry giants are buying companies so that they can either stay ahead of or catch up to the competition.

To make sense of this acquisition mania, Business 2.0 caught up with Paul Deninger, CEO of Broadview, a global investment bank specializing in high-tech mergers and acquisitions. Deninger, who was honored as one of Business 2.0's "25 Most Intriguing Minds of the New Economy" (Premiere, p53), explains how the gorillas of the Internet industry are using their market caps for strategic acquisitions.

Startup tech companies now seem more likely to sell out to larger players than go for an IPO. What caused the shift?

People realize that the acquisition process is a strong strategy for becoming the gorilla in a market space. Cisco Systems, more than any other company, showed how acquisitions can take one from the middle of the pack to domination. One reason for Cisco's success is that it had a better sales channel than anyone else in an important market, internetworking. So it could acquire a small company for a huge price with the confidence that it could sell the hell out of the product once Cisco owned it, and easily make that money back. Cisco became even more powerful, and its sales channel all the more formidable. There are more than a few companies in the Internet industry that would like to emulate this consolidation model.

It sounds like the death knell for the rhetoric that the Networked Economy was going to offer everyone equal play.

Everyone does have a more or less equal shot in the early stages of a market's development. Consider automobiles. The automobile industry is consolidated down to three major players in the United States, and to a handful of other players around the world. But there were hundreds of automobile manufacturers at one point. All markets consolidate with time.

In 1998, the median acquisition size grew dramatically. Will that continue?

Yes, because the drive for scale is going to increase. Whatever is defined by scale eventually grows. It used to be that we only had one billion-dollar software company. Now we've got a dozen. Likewise, as scale in the Internet industry continues to mount, companies have to make larger deals to keep pace.