< Browse > Home / Financial Literacy, Management, Private Equity, Venture Capital / Blog article: Putting Recent IPO / M&A Hype in Perspective

| Mobile | RSS

Putting Recent IPO / M&A Hype in Perspective

In the past few weeks there have been a number of high profile IPOs such as Verisk Analytics ($1.875 billion), A123 Systems ($380 million), and Talecris Biotherapeutics ($950 million).  Additionally, there have been a few high profile M&A deals such as Cisco’s $3 billion acquisition of Tandberg, Xerox’s $6 billion acquisition of ACS, and Dell’s $3.9 billion acquisition of Perot Systems.  In the past week alone there have been over 19,000 articles and blog posts about how recent IPOs and M&A are going to lift the economy out of the recession.

While these deals are excellent news, it is important to put them into perspective.  Technology-related IPOs and mergers are at a five year low.  Recently, the National Venture Capital Association, in association with Thomson Reuters, published some sobering statistics about the venture-backed technology exit market.  Consider the following charts:

Tech IPO and M&A Deal Activity Has Fallen Off A Cliff

 Hype 1

M&A deals have dropped to an average of 63 deals a quarter.  It’s hard to say what a ‘typical’ quarter should be, given that the 100+ deal quarters in 2006 and 2007 were fueled primarily by cheap debt used by private equity firms to snap up various tech properties.  Tech IPOs have fallen off a cliff with just 7 IPOs in the past two years.

Total IPO and M&A Dollars Show a Similar Trend

IPO proceeds are barely 25% of what was produced in 2006 and 2007.

Hype 2

 

 

 

 

 

 

 

 

 

 

The value of M&A transactions is also about 25% of what it used to be.

Hype 3

 >50% of Venture Backed Exits Go For <1x Revenues

 Hype 4

Perhaps the most sobering statistic is that more than half of the deals are valued at less than one times trailing twelve months revenues.

There are a number of factors that are impacting technology company exit events.  Some of the more significant factors include:

Lack of Debt Financing.  A large number of technology exits in 2006 and 2007 were fueled by the availability of covenant-lite debt that acquirers, like private equity firms, could use to fund acquisitions.  At the peak of the last credit bubble, private equity firms could borrow 6 to 10 times a target’s restructured EBITDA (EBITDA Leverage Ratio).  In today’s market if an acquirer can find any debt, the maximum leverage ratio may be just 2x ttm EBITDA.  Under these constraints an acquirer has to put in more cash or equity to get a deal done.  This limits what they are willing to pay for properties.  Private equity firms loved debt heavy deals since they increased the relative returns on equity once a portfolio company exits down the road.

Valuation Expectation Mis-matches.  While common sense would dictate that now is a great time to buy, given the relatively low prices of public and private technology companies, the opposite is actually true.  Most companies have little incentive to sell at today’s depressed valuations.  So while many companies are approached, few engage in serious discussions and negotiations.  Additionally, most private equity buyers are being extremely disciplined in the valuations they are willing to pay.  In the case of three recent deals (MSC Software, SumTotal Systems, and SoftBrands) none of the acquirers paid more than 1x trailing twelve months revenues for the companies they acquired.  Even Amazon’s highly touted acquisition of Zappos was valued at only 1.45x trailing twelve months revenues.

Time Required to Negotiate & Close Deals.  The elapsed time required to negotiate and close deals is rising significantly.  In the case of a number of acquisitions in the ERP space in the past six months it has taken on average over 225 days from the point of first contact to the announcement of a definitive agreement.  That’s almost 8 months.  At the height of the credit bubble the same types of deals were being done in less than two months.  One of the industry’s most prolific acquirers, Infor Global Solutions, at one time was closing two acquisitions a month.  It took 478 days to get to a definitive agreement between Zappos and Amazon.

So what exit alternatives do tech companies have in light of the reality of today’s market?  For private tech companies the best option might be a minority investment.  Under this scenario a private equity firm purchases a non-controlling interest in the company.  The company’s existing shareholders get the opportunity to monetize their existing investment at decent valuations and the company gets new working capital to fund growth.  In the past few years, many private equity backed firms have been able to use leveraged recapitalizations to generate a return.  In a recap, a company borrows money and uses the proceeds to pay dividends to investors.  While this approach has been maligned in the press, it has nonetheless generated significant returns for investors.  The collapse of the credit markets, however, have pretty much eliminated leveraged recaps as a near term monetization strategy.  Minority investments, however, offer a viable option in today’s market.  As noted in a recent Wall Street Journal article, TA Associates, Inc. is seeing success with minority investments:

“TA Associates Inc., which finished raising a $4 billion fund in the summer, did two deals in September, agreeing to buy post-secondary education provider Vatterott Educational Centers Inc. from Wellspring Capital Management LLC and acquiring a minority stake in Dealer Tire LLC. It has already announced two deals in October.

“We’re back!” TA Managing Director Jonathan Meeks said. “We focused on companies with high levels of visibility that are still growing in this economy.”

Three of TA’s four recent deals were minority investments. That’s a common investment style for TA, but Meeks expects to see more widespread adoption of it among other buyout firms as buyer and seller expectations begin to line up. “Nobody wants to sell 100% of their business because the pricing isn’t great,” Meeks said.

I can report that in informal discussions I have had with several technology private equity firms in the past six months the topic of minority investments has come up every time.  Perhaps minority investments will become leveraged recaps of 2009 and 2010.

Leave a Reply 10831 views, 1 so far today |

Leave a Reply


Warning: fopen(/4255305384_8e90aec34c_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint3
Warning: fopen(/4255305348_5022eca28d_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint2
Warning: fopen(/4254540579_b296f43c7b_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint1
Warning: fopen(/4255305256_2b68d522d5_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
Money machine
Warning: fopen(/4254540331_8836e369cc_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
manrev2
Warning: fopen(/4255305016_138cd3d3eb_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ManRev1
Warning: fopen(/4255304954_48dd4292dd_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
idea2
Warning: fopen(/4255304438_ed7edfa4a2_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
chain-links2
Warning: fopen(/4254539541_30a19becda_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash
Warning: fopen(/4254539317_1e015d3629_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash