July 1, 2011
First-Half Liquidity Tracks 2010, But Investors Are More Upbeat
This year looks a lot like last year, the latest liquidity data for venture-backed companies show, but the mood in the industry is more upbeat.
In the first half, 25 venture-backed companies went public, two more than in the first six months of 2010, according to Dow Jones VentureSource. On the M&A front, 215 companies were acquired, down a bit from 236 in the first half of 2010. But the value of those deals was higher, totaling $19.45 billion versus $16.58 billion at this point last year.
Driving optimism is the market's response to several technology IPOs in the second quarter, especially LinkedIn Corp., which went public at a market valuation of about $5 billion and has performed well since.
"I think for the venture community, the IPO market has to feel much different than last year," said Michael Fitzgerald, managing general partner of Commonwealth Capital Ventures. "There have been some really nice hits."
"I've seen a really decided shift in the mindset of tech CEOs, and venture capitalists as well, that we ought to be shooting for IPOs again," said Sandy Miller, a general partner at Institutional Venture Partners.
The pace of IPOs remains well below 2007, when there were 42 in the first half. But the pipeline is well-stocked with 45 companies in registration to go public, according to VentureSource. "There's a far larger volume of prospectuses being drafted today than 12 months ago," Miller said.
"You're going to continue to see the party roll on with new tech filings," said Ben Howe, chief executive of technology investment bank America's Growth Capital. He said the markets got a bit overheated and with almost half the newly minted public technology companies now trading below their IPO price, "Investors overall haven't done as well as you might think they have in looking at LinkedIn and a few others."
Still, he said, "Assuming the investment banks are pricing these companies at reasonable levels, there's no reason why the IPOs shouldn't continue at a very strong pace."
Paul Deninger, a senior managing director at investment bank Evercore Partners, said he, too, sees a strong pipeline of technology IPOs, but worries that investors might sour on the market if they continue to see offerings such as those of LinkedIn and Pandora Media Inc. where a smaller than typical percentage of company stock is offered. Deninger said such "micro-float" IPOs result in undue volatility. "I'm very bullish on the IPO market," he said. "I'm nervous about overreaching."
Deninger said the M&A market is good but not great. It's good because buyers are "cash-rich and growth-starved." On the other hand, buyers are "very disciplined" and there are fewer of them. As a result, Deninger said, "The best companies can get very a good exit and the not-so-best companies probably can't get an exit."
Howe predicted that M&A in the second half will probably look a lot like the first. While some potential buyers worry about high prices, "You've got great demand and you've got great supply and you've got pretty stable markets overall to play in," he said.
The median acquisition price, according to VentureSource, was $64.4 million, well above last year's $40 million and slightly higher than the median for 2007. The most active acquirer during the first six months of this year was Google Inc., which bought six companies. The largest acquisition was biopharmaceutical company Plexxikon Inc., which sold to Daiichi Sankyo Co. for $805 million. VentureSource is a research unit of Dow Jones & Co., a News Corp. company and publisher of this newsletter.