August 10, 2004 -- Venture-backed companies sold at an improved pace in the second quarter of 2004, as activity rose for the fifth consecutive quarter, according to a new report.

A total of 86 venture-backed companies were sold between April and June, said Thomson Venture Economics and the National Venture Capital Association. Of those deals, 48 disclosed their terms with a total value of $4.5 billion. The average value of the disclosed deals improved to $94 million, up from $88.6 million in the first quarter.

The second quarter numbers showed an improvement in both number and value over the first quarter, when 77 companies were sold, with 44 disclosing a total value of $3.9 billion.

While the quarter-over-quarter numbers were strong, the year-to-year numbers were even better. There were a total of 163 deals in the first half of 2004 compared to 142 deals in the first half of 2003. The $8.4 billion value of the 92 disclosed deals in first half of 2004 beat the $7.7 billion in deals disclosed in all of 2003. The average size of a deal in 2004 was also nearly 50 percent more than that in 2003.

Merger and acquisition valuations are closely monitored because, along with initial public offerings, they drive venture capital returns, according to Mark Heesen, president of the NVCA. The gain in the average deal size "is a positive trend that suggests that we are moving towards healthier exits," he said.

By sector, media and communications had the biggest quarter in terms of valuation, with a total disclosed value of $1.14 billion from seven deals. Three deals made up almost all the value, including Ask Jeeves' $501 million acquisition of Interactive Search Holdings, the largest deal of the quarter. The average deal size was also the largest at nearly $163 million.

The software sector closed the most deals with 25. The value of the ten disclosed deals was $790 million, meaning deals averaged $79 million, well below the average of all deals for the quarter. Total deal valuation was also down significantly from the $1.35 billion in deals disclosed in the first quarter.

"The fact that the software sector represented the largest group of deals but prices below the overall average may indicate a heightened market appetite for other sectors right now," said Jesse Reyes, vice president of Thomson Venture Economics.

The second largest deal of the quarter was Ciena's purchase of Catena Networks for $466 million. That deal pushed telecommunications past software to make it the second most active sector in terms of disclosed value.