New York’s Donovan Data Systems agreed to merge with Chicago’s MediaBank to form a new company called MediaOcean, according to a press release. MediaBank and Donovan Data Systems both provide media management software for advertising agencies that deal with print, television, radio, and online ads. Through MediaOcean, the merged company plans to create a universal operating system for ad agencies to use.

The deal is pending regulatory approval and thus far no financial details have been disclosed. Michael Donovan, founder of Donovan Data Systems, will serve as executive chairman of MediaOcean. MediaBank’s CEO Bill Wise will be CEO of the merged company. MediaOcean is expected to have more than 800 employees across North America, Britain, France, Germany, and India. Both Donovan Data Systems and MediaBank have offices in New York and Chicago. MediaOcean will be headquartered in New York.

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Consolidation comes to the daily deals arena. New York startup CityPockets said in a blog post Wednesday it acquired instant deals service DealBurner. No financial terms were disclosed. One-year-old CityPockets is a secondary marketplace for reselling daily deals. DealBurner, founded in July, is a text message–based service that aggregates instant deals from such sources as Groupon Now and LivingSocial Instant. Jason Fertel, DealBurner’s founder, joins CityPockets as its chief product officer. CityPockets’s investors include Great Oaks Venture Capital, MI Ventures, and LaunchBox Digital.

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The climate for software deal-making improved during the second quarter, especially for cloud-based companies offering Software-as-a-Service. We’ve got the rundown on that, as well as a new software deal to be counted in the next quarter.

—San Diego’s Software Equity Group counted 397 buyouts and mergers in the software sector with a cumulative value of more than $21.3 billion during the second quarter that ended June 30. The investment banking and advisory firm says global spending on information and communications technologies is fueling higher valuations for public software companies, although much of that growth has been driven by big deals for Software as a Service.

—Pleasanton, CA-based mortgage software developer Ellie Mae (NYSE Amex: ELLI), which only went public in April, said it has agreed to acquire San Diego’s Del Mar DataTrac for $25.2 million over the next three years.

—After investing in Assistly, bitly, Klout and TweetDeck, hedge fund manager Howard Lindzon decided to start StockTwits in San Diego. The company’s TweetDeck-like platform enables investors to share their investing ideas, stock tips, comments, charts, and other information in 140-character tweets. Lindzon told me in an interview, “If I’m running an institutional trade desk, and following real-time streaming of news, then Twitter is going to rule the world.”

—First a consortium that includes Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MFST spent $4.5 billion to buy Nortel Networks and its wireless patents. Then Google (NASDAQ: GOOG) bid $12.5 billion to acquire Motorola Mobility (NYSE: MMI and its wireless patents. Now here are rumors that San Diego-based Qualcomm (NASDAQ: QCOM) has been considering a buyout of InterDigital, a Pennsylvania wireless technologies specialist that recently opened a R&D outpost in San Diego. The problem with this rumor, though, is that Qualcomm already has a substantial number of wireless patent holdings.

—It’s kind of a LoJack for missing pets. Snaptracs, a year-old Qualcomm subsidiary, is introducing a consumer product next month—a lightweight tracking device called Tagg that attaches to a pet’s collar and helps pet owners track down their lost pets. The $200 system includes a GPS location device, and alerts pet owners when their dog or cat strays beyond its “Tagg Zone,” a geo-boundary that pet owners set up.

—San Diego CEOs on the move: Desmond Wheatley, Envision Solar’s president and chief operating officer, has succeeded founder (and Xconomist) Robert Noble as CEO, and Noble is now executive chairman. San Diego-based Decision Sciences named Stanton D. Sloan as its new CEO. Sloane is the former CEO of SRA International, the Fairfax, VA-based IT company acquired by Providence Equity Partners earlier this year for nearly $1.9 bil

—San Diego-based Astute Networks signed a distribution agreement with Tech Data (NASDAQ: TECD) to help extend the adoption of ViSX G3, technology that Astute developed to accelerate server and desktop virtualization.

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Amazon.com (NASDAQ: AMZN) said Thursday that government regulators have approved its purchase of New Jersey-based Quidsi, the parent company of Diapers.com and other online retail brands. Amazon announced last November that it would purchase Quidsi for $500 million in cash, along with assuming about $45 million in debt. The companies said at the time that Quidsi would continue operating under its own management team. Thursday’s regulatory filing, first reported over at TechFlash, says Amazon expects the deal to close around the first of April.

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Bellevue, WA-based drugstore.com is being scooped up by Walgreens, the nation’s largest drugstore chain, for $429 million in cash. Deerfield, IL-based Walgreens (NYSE: WAG) said it would maintain drugstore.com’s headquarters and a separately branded website. Drugstore.com (NASDAQ: DSCM) presently employs about 1,000 people in its offices, distribution centers and call center.

The acquisition price of $3.80 per share is a 113 percent premium over drugstore.com’s closing price yesterday, the companies said. Walgreens, which is financing the deal with cash on hand, expects it to close at the end of June. Drugstore.com said its board had unanimously approved the sale.

“We believe we have made significant progress over the last six years and built an organization with a broad and deep bench of Internet experience. The opportunity to become a part of Walgreens is the right next step in this journey,” drugstore.com Chairman and CEO Dawn Lepore said in a statement.

Drugstore.com has been hanging around since the days of the dot-com bubble—it was founded in 1998 and began selling online in February 1999. The company rode out the bust and eventually assembled a strong presence online, with more than $456 million in sales last year. Walgreens said it was adding 3 million customers and about 60,000 products in the deal, along with the affiliated sites Beauty.com, SkinStore.com, and VisionDirect.com. Walgreens posted sales of $67 billion in fiscal 2010.

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The sale of Bellevue, WA-based T-Mobile USA to AT&T for $39 billion shook up the mobile world this weekend, both nationally and in the Seattle area. It’s unclear what the practical effects will be for T-Mobile employees in the Puget Sound region, and we might not know for some time: The companies say the acquisition process could take about a year.

T-Mobile’s sale does, however, clearly mark the end of another major era in the region’s longstanding leadership in the wireless field. Check out this really interesting interview that Xconomy’s Greg Huang did with venture capitalist Tom Huseby in 2008 for a sense of the history at play. Basically: AT&T’s wireless business came of age with the 1994 acquisition of Seattle’s pioneering McCaw Cellular. And McCaw veteran John Stanton started VoiceStream, which was purchased by T-Mobile in 2001.

As Huseby noted in that Xconomy interview, “Every time someone was bought, they actually didn’t move people out of Seattle. People would move here, and it just kept growing … We have more concentration of carrier presence here than anywhere else in the country. It’s unbelievable.”

That’s not the situation today. AT&T’s headquarters are in Dallas and will undoubtedly stay there. In Sunday’s press release, AT&T did say that “the combined company will continue to have a strong employee and operations base in the Seattle area.” An AT&T spokesman told The Seattle Times’ Brier Dudley that “any reduction we anticipate will come through natural attrition.” GeekWire also got ahold of the memo sent to T-Mobile employees, in which CEO and President Philipp Humm said that “AT&T’s leadership has said keeping [T-Mobile's] talented people through this transition is one of their top priorities.”

Meanwhile, AT&T President Ralph De La Vega tells Mobilized that the tie-up will improve the network, won’t be a distraction for customers, and should have a good chance at getting federal approval. Washington, D.C.’s The Hill interviewed AT&T policy executive Jim Cicconi, who indicated that one element of the regulatory case will be that consolidation in mobile was inevitable.

And finally, The Seattle Times’ Jon Talton saw no positives for the Seattle area in the T-Mobile news. I found particularly compelling Talton’s emphasis on the effect that losing a major standalone tech company will have on the entrepreneurship landscape in the region. Therefore, his take gets the last word:

“I believe there’s nothing like a major headquarters for well-paying jobs, civic stewardship, attracting talent and capital, and fostering executive talent that leaves the mother ship to start new enterprises. Back-office towns always languish.”

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Eight months after San Diego’s Accelrys (NASDAQ: ACCL) completed its merger with Santa Clara, CA-based Symyx Technologies, the scientific software developer is today lifting the curtain on a new strategy based on the company’s broader and deeper resources.

The merger, valued last year at about $175 million, combined Accelrys’ flagship software for simulating and modeling scientific experiments with Symyx’ strength in cheminformatics and notebook software used to chart and manage lab experiments. Along with its fourth-quarter financial results today, Accelrys is also sharing some new software products that are intended to help manage the entire process of scientific development—from R&D to commercialization and manufacturing—at industry, academic, and government institutions.

Max Carnecchia

“It’s the future for us, the strategy for the next two to three years,” says Accelrys CEO Max Carnecchia. “What we’re hearing from our largest customers is that they really need a framework, they need a [software] architecture that can harness all of the innovation, all the experiments, all the modeling and simulation, and all the work they’re doing across labs on a global basis, both within their own organizations and within their collaborators.”

In explaining today’s new product introductions, Carnecchia said, “A series of individual islands of capabilities have now been brought together into a true platform.”

The Symyx merger brought Accelrys a combined base of more than 1,350 customers, including 29 of the top 30 biopharmaceutical companies, all five top chemical giants, and many U.S. government agencies and universities.

“It was actually our customers who talked with us about their needs during the merger and pre-merger” that led to the strategy, says Melissa Purcell, Accelrys’ senior director of marketing communications.

“Obviously, we had thoughts around the idea that the combination was going to create … Next Page »

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Keane, a Boston-based IT services firm, announced today that it has entered into a merger agreement with Japan-based NTT Data, in which its parent company Keane International will merge with Knight Subsidiary Corporation, a unit of NTT Data. Keane will become a wholly-owned subsidiary of NTT Data as a result of the merger.  ”We are pleased with the transaction and the vital role that Keane will play in increasing NTT Data’s global footprint,” said Bob Khanna, Keane International board member and managing director of Citigroup Venture Capital International Technology Holdings, a majority owner of Keane International. Keane, which will remain in Boston, did not reveal the financial details of the transaction, though other media outlets have reported that NTT Data paid in the neighborhood of $1.2 billion for the firm. Japan-based NTT Data said the transaction will enable it to expand its U.S. footprint and acquire blue chip customers in the states.

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The Connect Innovation Report that was released last week shows that San Diego’s innovation economy is a mix of contrary signals. We also saw a number of tech sector deals, and we’ve got it all wrapped up for you here.

—San Diego’s Entropic Communications (NASDAQ: ENTR, which makes semiconductors for home entertainment networks, raised $99.1 million after fees and other costs in a public offering of 10.75 million shares last week. The company filed for the offering on Tuesday, and priced its shares at $9.70 each on Thursday. Underwriters have the option of buying an additional 1.6 million shares. Entropic recently raised its revenue outlook for the third quarter of 2010, as major cable and satellite TV providers expand their rollout of multi-room DVR set-tops that use the company’s chips.

—The VizLab, officially known as the Immersive Visualization Center at San Diego State University, is working to make it easier to incorporate “crowdsourcing” in the Web-based, geographic information system-referenced maps it creates about natural disasters. Eric Frost, an associate professor of geological sciences who co-directs the VizLab, tells me a smartphone app available at the CrisisCommons wiki network enables ordinary folks to send pictures that include the date, time, location, and text information.

—The Connect Innovation Report shows that 64 technology startups were founded in San Diego during the second quarter of 2010, almost a 37 percent decline from the 101 startups formed during the second quarter of 2009. Mergers and Acquisitions were up from the previous quarter, and federal patent filings were up 22 percent over the previous quarter, the most issued in more than two years. But venture capital funding dropped, with the total VC investment of $171 million representing a 33 percent drop from the $257 million that flowed into San Diego during the second quarter of 2009. VC funding was down nearly 70 percent from 2007 pre-recession levels.

—San Diego-based Avalon Ventures has raised $161 million for its ninth venture fund, exceeding its minimum fund-raising goal of $150 million. Avalon is one of the few local VC firms that’s still actively investing in new startups.

—Verve Wireless, which just moved into a new headquarters in Encinitas, CA, has raised $7 million in venture funding led by BlueRun Ventures of Menlo Park, CA. Verve’s technology lets newspapers and other media companies publish their content and serve ads across a variety of mobile devices.

—Leading medical and wireless industry technologists are gathering in San Diego this week for the first annual Wireless Health 2010 conference, which begins Tuesday at the Hilton La Jolla Torrey Pines. Scheduled speakers include Qualcomm founder Irwin Jacobs, Dean Kamen of DEKA Research, Dr. Chris Toumazou of Imperial College London, Dr. Patrick Soon-Shiong of Abraxis Health, and Col. Ron Poropatich of the U.S. Army’s Telemedicine and Technology Research Group.

—Thailand’s Cal-Comp Electronics said it is acquiring Spectragraphics, a San Diego holding company that operates Total Electronics and SMS Technologies, which are both electronics manufacturing service companies. Terms of the deal were not disclosed.

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Merck (NYSE: MRK) announced plans to shutter its research site in Cambridge, MA’s Kendall Square neighborhood alongside seven other research facilities worldwide over the next two years. It will also phase out another eight manufacturing sites, as part a restructuring plan that follows its November 2009 merger with Schering-Plough. Some of the Kendall Square research operations will shift across the river to Merck’s facility in Boston’s Longwood Medical Area, a company spokesman told me. New Jersey-based Merck previously announced plans to cut 15 percent of its combined 100,000-person workforce, and the moves announced today will fall under that umbrella.

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The world of outsourced drug research and development might get a lot smaller. Charles River Laboratories International is aiming to buy the Chinese R&D services firm WuXi PharmaTech for a whopping $1.6 billion, the companies announced this morning.

Wilmington, MA-based Charles River (NYSE:CRL) reported that it plans to gobble up Shanghai-based WuXi in a deal that values WuXi (NYSE:WX) at $21.25 per share, a 28-percent premium on the firm’s closing stock price on April 23. Charles River is offering to buy WuXi for a combination of cash and its common stock. The deal requires shareholder approval and is slated to close in the fourth quarter of this year, according to the companies.

The buyout would significantly expand Charles River’s global presence in the outsourced R&D market both in the U.S. and China. WuXi has more than 1.8 million square feet of drug R&D space in China, as well as three sizable research and manufacturing centers in Atlanta, Philadelphia, and St. Paul, MN, according to its website.

“This transaction revolutionizes the contract research landscape by creating the only global contract research organization, or CRO, to offer fully integrated research and drug development services from molecule creation to first-in-human testing,” said James Foster, Charles River’s chairman and CEO, in a statement. Under the terms of the merger deal, Foster would be chief executive of the combined entity, and WuXi’s CEO, Ge Li, would be a corporate executive vice president and be president of the company’s operations in China.

WuXi is one of the fastest-growing competitors in the outsourced drug R&D world, fueled by China’s growing population of Ph.D.s and scientists, the Wall Street Journal reported yesterday. (The Journal article, published yesterday, gives a decent overview of both companies’ capabilities.) Drug companies are expected to increase their use of CROs as they continue to trim the size of their own R&D organizations to reduce expenses and focus more resources on the marketing end of the pharmaceutical business.

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It’s too early to say whether it’s the beginning of the end of the liquidity drought, or just the end of the beginning. But after seven straight quarters of declining IPO and M&A earnings for venture-backed U.S. companies, there was a ray of hope in the fourth quarter of 2009. Venture-backed firms raised $7.5 billion through mergers and acquisitions and IPOs in Q409, the highest total since the first quarter of 2008, according to year-end data released today by Dow Jones VentureSource.

It was the first quarterly increase in liquidity since 2007, and exceeded Q408 levels by almost 50 percent. The jump was fueled largely by a dramatic increase in the median amount paid in company acquisitions, from about $30 million per deal in the third quarter of 2009 to nearly $85 million per deal in the fourth quarter.

“The fourth quarter has set the stage for an active year in M&As in 2010,” said Jessica Canning, Dow Jones VentureSource’s global research director, in a statement. “As the economy improves, acquirers are gaining confidence in their own financial situation and returning to strategic acquisitions. At the same time, the steady trickle of public offerings is teasing investors who expect the IPO window will re-open in the coming year.”

Of course, it’s also easy to take a glass-half-empty view of the latest round of data. The median M&A amounts in the fourth quarter were inflated by a small handful of relatively large deals, including Amazon’s $847 million acquisition of Zappos, ViaSat’s $568 million acquisition of WildBlue Communications, and Logitech’s $405 million purchase of LifeSize Communications. The total liquidity among venture-backed companies in 2009 was only $17.1 billion, a poor showing next to 2007′s total of $61 billion and 2008′s $26.1 billion. And the median amounts paid in M&As, averaged across all of 2009, was just $27 million, which looks slight compared to 2007′s $73 million and 2008′s $33 million.

About the best thing you can say about M&A trends is that acquirers were finding a lot of bargains in 2009. Canning called 2009′s $27 million median “a positive sign for acquirers looking to purchase companies at reasonable prices.”

The IPO market, after a pathetic 2008, improved by only a small margin in 2009. Seven venture-backed companies went public in 2008, raising a total of $550 million. In 2009, IPOs among venture-backed companies increased to eight, with the total amount raised increasing to $903 million. (Three fourth-quarter IPOs—by Chicago-based Echo Global Logistics, Sunnyvale, CA-based Fortinet, and Seattle-based Omeros—accounted for $220 million of that total, making it the slowest quarter since Q109, when there were no IPOs at all.)

But while the IPO numbers did increase in 2009—and while companies in Xconomy’s home cities, including Watertown, MA-based A123Systems ($371 million), San Diego-based Bridgepoint Education ($142 million), Woburn, MA-based Logmein ($107 million), and Seattle’s Omeros ($68 million) contributed significantly to the 2009 totals—the IPO market was still largely shuttered compared to 2007, when 78 companies went public, raising $6.9 billion.

Could 2010 turn out better? It almost has to, unless a big chunk of the 25 venture-backed companies currently in registration with the SEC drop their IPO plans. One interesting tidbit in the Dow Jones VentureSource data is that venture-backed companies seem to be moving to pay off their backers with greater haste. The companies that achieved exits through mergers or acquisitions in 2009 had been in business for a median of 5 years and had raised a median of $18 million, compared to six years and $22 million for companies acquired in 2008. Companies that went public in 2009 were 7.9 years old on average and had raised $43 million, compared to 8.7 years and $55 million for companies that went public in 2008.

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Dealmakers appear to be getting their business done before the week of Thanksgiving—because we’ve seen a decent stream of deal closings involving Boston-area life sciences and tech companies over the past week or so.

—Framingham, MA-based Punchbowl Software, which operates the party planning website MyPunchbowl.com, said it acquired technology assets of a group vacation website called I’m In. Punchbowl founder and CEO Matt Douglas provided details on why the transaction made sense for his startup.

—After months of operating quietly, seed-stage venture fund Founder Collective officially debuted last week. Eric Paley, a managing partner and co-founder of the firm, told us why he and other software entrepreneurs came together to form the new venture outfit, which has offices in Cambridge, MA and New York City. Here’s a hint: They were a bit frustrated with the status quo in the venture industry.

—Fate Therapeutics, the San Diego-based biotech startup focused on developing techniques that make stem cell research practical for the pharmaceutical industry, reeled in $30 million in a Series B round of venture financing. Kirkland, WA-based OVP Venture Partners led the new round of investment in Fate, which was founded by top academics at Harvard University, Stanford University, The Scripps Research Institute, and the University of Washington.

—ImmunoGen (NASDAQ:IMGN), a Waltham, MA-based biotech firm, reported this week that the firm sold a second license to its technology—which is for linking targeted antibodies to cell-killing molecules—to industry giant Amgen (NASDAQ:AMGN) for $1 million upfront, plus potential milestone payments.

—Corindus, a Natick, MA-based startup developing a robotic system for implanting vascular stents, collected $5.3 million of a planned $10 million in venture dollars, according to a filing with the Securities and Exchange Commission.

—Cambridge -based Ligon Discovery found $1 million in a seed round of financing from incTANK Ventures, with plans to validate its small molecule microarray system for drug discovery that was developed at Harvard. The company was founded by folks from Harvard Medical School and the Broad Institute of MIT and Harvard.

—We spotted Angus Davis, a co-founder of Microsoft’s voice-based Internet search subsidiary Tellme Networks, at Polaris Venture Partners’ Dogpatch Labs recently and wondered what he was up to. It looks like he’s been working on a new Providence, RI-based startup called Swipely, which quietly swept up a cool $1 million from First Round Capital.

—Jealous? Highland Capital Partners, the Lexington, MA-based venture powerhouse, closed its eighth fund, worth a whopping … Next Page »

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Former BAE Systems executive Walt Havenstein takes over today as SAIC’s new CEO, but the big question is if the new boss will move the company’s headquarters from San Diego to McLean, VA. Get our roundup of San Diego’s biztech news here.

—San Diego defense contractor SAIC (NYSE: SAI), which has been shifting some key executives and corporate functions to Northern Virginia since 2006, appears poised to announce the relocation of its headquarters from San Diego to McLean, VA. If SAIC moves its HQ, San Diego’s roster of Fortune 500 companies would go from four to three. It only increased to four in August when CareFusion (NYSE: CFN), the Cardinal Health spinoff, established its HQ here. The other two are Qualcomm (NASDAQ: QCOM) and Sempra Energy (NYSE: SRE).

—How unique is your company’s culture? Xconomy asked the CEOs of startups in Seattle, Boston, and San Diego to use one word to describe their company’s corporate culture. We got 21 different answers. San Diego’s CEOs said Innovative, Love, Open, Entrepreneurial, and Speechless. Actually, “speechless” is my word. VMIX CEO Mike Glickenhaus was the only one who said, “I wish I could come up with one but I can’t.”

—At a time when rapid changes in technology are bringing Internet TV closer to reality, DivX CEO Kevin Hell says he is positioning the San Diego-based digital media company to be the friendly and agnostic technology provider. Hell says he wants the DivX format to be the “any-to-any-solution” that plays video content on any device from any manufacturer.

—Corporate buyout executives from Qualcomm and Google voiced cautious optimism about the economic climate for M&A deals involving venture-backed companies during a panel discussion organized last week by the San Diego Venture Group. Qualcomm’s Duane Nelles and Google’s Karim Faris also said it’s becoming more important for startups to secure an early corporate partner with a vested interest in developing the technology.

—San Diego Gas & Electric is leading a coalition of 28 companies, academic institutions, and other organizations to integrate emerging “smart grid” technologies in the regional power grid—and are bidding for $100 million in matching federal stimulus funds to help pay for it.

—Connect, the San Diego non-profit group that promotes technology and entrepreneurship, issued its second-quarter report on San Diego’s innovation economy. The study found 102 new technology companies were created during the three months that ended on June 30. That’s more than the 66 startups during the first three months of the year and better than the 76 companies launched during the same quarter in 2008.

—In its fifth edition of the “Venture Impact” report, the National Venture Capital Association found that venture-backed companies employed more than 12.1 million Americans in 2008. These companies generated $2.9 trillion in revenue in 2008, roughly one-fifth of U.S. gross domestic product. San Diego attracted $1.2 billion in venture investment across biotechnology, software, and information technology, among other areas, according to the NVCA report.

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San Diego DNA vaccine developer Inovio Biomedical (NYSE: INO) says it has completed its merger with VGX Pharmaceuticals of Blue Bell, PA. The combination gives Inovio more time to develop its approach to new preventive and therapeutic vaccines against cancers and chronic infectious diseases such as HIV. Inovio says it has $11.7 million in available cash and VGX had $2.7 million, as of the end of March.  Inovio says this cash position will support Inovio’s operations through Q2 2010.

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One of San Diego’s technology startups made an acquisition, and another got a secondary round of venture funding last week. That might not signify the end of the downturn for San Diego’s venture-backed companies, but they were welcome developments nevertheless. Meanwhile, entrepreneurs in San Diego’s technology sector got lots of survival advice.

—Our timing made us look prescient this week when we profiled Slacker and Dennis Mudd, who had raised almost $60 million in venture capital since founding San Diego’s online streaming music website in 2007. If only we had known that two days later Slacker would disclose it had raised another $9.7 million, we would have asked why the online music streaming company needed the extra funding (rest assured, we will press for more on this front anyway). Slacker just raised $5 million in December.

—BakBone Software, the San Diego data backup and recovery company, said it paid more than $15.9 million to acquire ColdSpark, a Broomfield, CO, company that specializes in managing global messaging infrastructures. BakBone says its data protection platform, combined with ColdSpark’s proprietary email platform, will allow customers to improve corporate compliance, mitigate risk, enhance performance, and reduce operational costs.

—Daylight Solutions has developed technology that is the stuff of science fiction. The four-year-old, venture-backed startup has created laser-based sensors capable of detecting glucose in the breath of diabetic patients and carbonyl sulfide in the breath of patients suffering from liver disease. Daylight Solutions’ lasers operate at mid-infrared wavelengths, a part of the spectrum co-founder Tim Day describes as “the color of heat.” I profiled the company and its latest move to prove its technology can be used by the military to prevent heat-seeking missiles from homing in on aircraft in flight.

—Don Dixon, a co-founder and managing director in the Palo Alto, CA, office of Trident Capital, delivered some tough advice at the annual Red Herring North America 100 conference, which was held in San Diego last week. Dixon says CEOs should be cutting costs in anticipation of worsening economic trends. He does not expect the IPO market to return anytime soon, and says his firm views mergers and acquisitions “as a game of musical chairs in which there are six chairs and 600 kids at the party. You want to be sure that you’re one of the ones who gets a chair.”

—Five months ago, Jim Zierick was named CEO of San Diego’s Nirvanix. Last month, the cloud storage technology specialist raised $5 million in a secondary venture round from its existing investors, which include Intel, Mission Ventures, Valhalla Partners, and Windward Ventures. So what’s next? Zierick told Xconomy’s Juha-Pekka Tikka that Nirvanix continues to grow and will likely need more venture capital next year.

—When the exits for venture-backed companies are closed, CEOs should work to get as close as possible to profitability, according to the panelists who discussed strategies for startups while capital markets remain shuttered at the Red Herring North America 100 conference in San Diego. Brian Gentile, CEO of San Francisco-based Jaspersoft, urged startup CEOs to “get to ‘great’ on operational excellence, and from there you’ll have many more options.”

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If you’re the CEO of a venture-backed company, what can you do when the exit doors remain closed for IPOs, and the collapse of capital markets has slowed mergers and acquisitions to a trickle?

That may be the question of the hour, or perhaps the year. But preserving your options, and creating new ones, was key to the answers that three venture investors and a San Francisco software company CEO offered yesterday at the Red Herring North America 100 conference in downtown San Diego. John Malloy of BlueRun Ventures in Menlo Park, CA, said he could think of two words that epitomize the situation for many startup ventures. One is constraint, and understanding this is a new world of constraints. The other is optionality. “Remember there are multiple ways to solve a problem,” Malloy said. “You certainly shouldn’t believe just what your bankers tell you.”

Just how startup CEOs can work to maintain their options and generate new ones, of course, was the hard part. But the participants in a panel discussion had a number of decent recommendations, along with some interesting observations. For example:

—It’s unclear whether the IPO market will open anytime soon, said Bob Ackerman, co-founder of Palo Alto, CA-based Allegis Capital. “We’re in a market where there’s a lot of chop, a lot of back and forth,” Ackerman said. But the burly venture investor added that mergers and acquisitions activity will likely resume sooner rather than later because “the big companies have pulled in their internal innovation,” as a way to cut their costs. “Now they are going to an external innovation model,” which means acquiring the startups that have been developing innovative technologies.

—Become extremely efficient. Cash-starved companies are better run, and keeping tight control of operations is crucial to survival. “We tell our companies to get to profitability and you can control your own destiny,” said Paul Ferris, a general partner with Azure Capital Partners, which has offices in San Francisco and Menlo Park, CA.

—”We’ve taken time to get a handle on our metrics,” said Brian Gentile, CEO of Jaspersoft, a San Francisco company that develops business intelligence software. “In the downturn, we saw an opportunity to take market share… It wouldn’t have been an opportunity, though, if we … Next Page »

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It’s hard for any company to raise capital in this recession, but several San Diego life sciences startups disclosed last week they had done just that. A few bright spots also appeared during a local seminar on mergers and acquisitions—so let the news light your way.

—A big deal on the other side of North America last week may bear some significance for San Diego’s Anadys, which has been developing a new treatment for hepatitis C. Cambridge, MA-Vertex Pharmaceuticals said it was buying ViroChem Pharma of Laval, Quebec, for about $375 million. Vertex, which has about 200 employees in San Diego, is adding some punch to its own hepatitis C drug by acquiring ViroChem.

—Qualcomm took another step in its succession plan last week when CEO Paul Jacobs added board chairman to his title, a job that was held by his father, Qualcomm co-founder Irwin Jacobs. The San Diego wireless chipmaker also disclosed that Paul Jacobs and company president Steve Altman took 25 percent pay cuts last month when the company froze the salaries of all employees.

—In an unrelated development, Qualcomm recently acquired the key assets of Digital Fountain, a Freemont, CA, startup that has developed software to optimize digital media transmitted over any network. The assets include a team of seven engineers led by Digital Fountain’s founder and CTO.

—The lore of technology innovation is replete with stories of iconic hits and misses, of Googles and Pets.coms. Xconomy added a new chapter to the literature last week with a tale about Erwise, an Internet browser invented by four Finns before Netscape changed the online world as we know it. It also was the first Xconomy story written by Juha-Pekka Tikka, a veteran newspaper reporter from Helsinki who is Xconomy San Diego’s Innovation Journalism Fellow through June.

—Regulus Therapeutics, the Carlsbad, CA-based joint venture formed in 2007 by Alnylam (NASDAQ: ALNY) of Cambridge, MA, and Carlsbad’s Isis, got $20 million in a first step toward independence. Alynlam and Isis each contributed $10 million to Regulus, which has developing microRNA-based drugs and now intends to continue that work as an independent company.

—A new life sciences company has come to light in San Diego. Evoke Pharma has been developing a new drug treatment for diabetic gastroparesis, a gastrointestinal disorder. Evoke Pharma has been operating in stealth mode since it was founded two years ago, but a financial filing that surfaced recently shows the biotech has raised almost $12.3 million in venture funding since 2007.

—While the overall market for mergers and acquisitions remains gloomy, John Stiska of Agility Capital says he sees a few signs of encouragement. Stiska, who spoke last week at an M&A workshop in San Diego, says mid-market equity funds are still buying stable, well-run companies. And Stiska says small-to-mid-size defense contractors throughout Southern California represent ideal targets for acquisition.

—San Diego’s Optimer Pharmaceuticals, which has two antibiotics for treating diarrhea in late-stage clinical trials, raised $32.9 million in a registered direct offering to institutional investors. Optimer (NASDAQ: OPTR) says it plans to use the proceeds for ongoing drug development and general corporate purposes.

—Lou Ryan, chairman of San Diego’s St. Bernard Software (OTCBB: SBSW) has stepped in as CEO with plans to expand the company’s line of Internet-filtering network security products. I spoke with Ryan, a software industry veteran and former venture partner at Menlo Park, CA-based Sand Hill Capital, about the firm’s new strategy.

—Jay Lichter, a San Diego venture capitalist and founder of Otonomy, told Luke his goal is to someday make the specialized drug developer for hearing disorders as big as Alcon, the Swiss eye care company. One of Otonomy’s early drug candidates is aimed at Meniere’s disease, an imbalance of inner ear fluid.

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Some unexpected bright spots appeared in the outlook for mergers and acquisitions yesterday during a workshop for local executives, which was co-sponsored by Connect and the San Diego offices of the Allen Matkins law firm.

The overall M&A market is bleak. But John Stiska, who oversees venture lending for the San Diego office of Agility Capital, says the regional picture is not as bad as he would have expected. That’s because mid-market equity funds are still looking to buy “decent” companies. To Stiska, “decent” means stable, medium-size companies that generate between $15 million and $50 million in annual revenue, and which show positive earnings before accounting for interest, taxes, and other costs.

“In Southern California,” Stiska says, “that’s largely the defense contractors that have been developing new technologies for both military and commercial customers. We have a lot of them in Los Angeles, Orange and San Diego Counties. They have stable backlogs. They’ve done pretty well in the past couple of years.” Stiska says he’s encouraged because many mid-market equity funds, which raise their investment capital from big insurance and pension funds, still have lots of capital—typically $300 million to $800 million.

Stiska says he also was surprised because roughly half of the San Diego executives who attended the workshop indicated they’re not looking to sell their companies—they’re looking to buy another company.

Clark Libenson, a San Diego lawyer who specializes in mergers and acquisitions, told me the M&A program usually consists of presentations on how to prepare a company for sale. It’s one way that law firms discreetly market their services. But organizers wanted this workshop more closely tied to current market conditions, so presentations by Stiska and others showed how M&A activity has changed since the credit crunch essentially shut down financing in the second half of 2007—a full year before the credit crunch hit the rest of the market. Highlights from their presentations on the 2009 outlook include:

—Capital constraints will continue to limit M&A activity, but cash-constrained companies will likely sell divisions that are not central to their core business so they can raise cash and weather the storm.

—”Mergers of necessity” will likely emerge as a prevailing theme.

—Conditions point to a buyer’s market, with capital-rich companies acting as key consolidators—and beneficiaries. By some estimates, S&P 500 companies have an aggregate $630 billion in cash.

—Creative financing structures, private investments in public equities, and stock deals are likely to be more prevalent in M&A transactions.

—Companies unable to refinance their debt will be forced to consider such alternatives as restructuring, selling assets, or selling the company—with pre-arranged sales under bankruptcy becoming more popular.

—Mega deals have come to a dead stop since July 2007, but middle market transactions have continued, albeit at a slower pace—partly because they typically require a smaller percentage of debt financing. Since 1998, more than 90 percent of all M&A transactions have been under $500 million.

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San Diego-based Gen-Probe (NASDAQ: GPRO) says it’s buying Tepnel Life Sciences, a British medical diagnostics company, for about $132.2 million. Gen-Probe chairman and CEO Hank Nordoff says the buyout expands Gen-Probe’s focus on nucleic acid tests by adding Tepnel’s expertise in genetic tests for cystic fibrosis, Down syndrome and inherited levels of high cholesterol. Gen-Probe’s tests are used mostly to screen human blood donations and diagnose human diseases.

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