Acquisitions favored by VC-backed firms
Acquisitions favored by VC-backed firms
Survey says IPOs being snubbed over pursuing mergers
Thomas Frostberg, Chronicle Staff Writer
Tuesday, April 4, 2006
Companies backed by venture capital funds are more likely to pursue mergers and acquisitions than public stock offerings, a new survey shows, extending a trend that has been prevalent during the past few years.
And that should remain the case for most of this year, according to a report released yesterday by the National Venture Capital Association and the Thomson Venture Economics.
"This is not good for the U.S. economy,' said Mark Heesen, president of the venture association. "The entrepreneurs need to see the Googles. If it's all about acquisitions, the dreams of the entrepreneurs will vanish."
The first quarter of 2006 was the strongest for venture-backed mergers and acquisitions since the first quarter of 2001, with a total value exceeding $4.8 billion spread over 43 deals, the report said. The average deal was 20 percent larger than first quarter last year and a good 60 percent larger than the deals made in the last quarter of 2005. (The fourth quarter is traditionally a strong time for stock offerings.)
At the same time, venture capital portfolio companies were involved in only 10 IPOs, raising a total amount of $541 million. The average is the lowest since the third quarter of 2002.
The M&A market will maintain its strength for the rest of the year, according to analysts.
"Buyers are out in force again, after looking inward for three or four years. Both strategic and financial buyers have money to spend and have confidence in the future. Sellers are seeing high prices on the M&A market and trouble in the IPO market," said Ken Marlin, managing partner for Marlin & Associates, an investment bank focusing on technology, information and media companies in the midmarket segment.
"It's a perfect storm driving the M&A market with a great deal of consolidation going on in the telecom equipment industry and among software companies. Mid-market companies need to bulk up, IT buyers have cleaned their balance sheets and are cash rich and there's competition from private equity buyout firms," said Tim Miller, vice president and general manager for financial markets at the San Francisco office of the 451 Group, a technology analysis firm.
Regulations under the Sarbanes Oxley Act and higher costs for being a listed company also force companies into M&A deals, according to the analysts.
"An IPO only provides partial liquidity to the shareholders, and being public these days is expensive. In the M&A market you get complete liquidity for the founders and avoid the administrative and regulatory burden," Marlin said.
Less-regulated stock markets outside the United States like the AIM list of the London Stock Exchange could be an alternative in the future.
"It's a lot less fun to play in the IPO market because of regulations. There is some momentum for the IPO market to pick up, but a lot of attention will be paid to the friendlier atmosphere of AIM, India or China," Miller said.
E-mail Thomas Frostberg at tfrostberg@sfchronicle.com.
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