Start-Ups Turn to Exchanges Overseas to Fulfill IPO Goals; Acquisitions Drop

Dow Jones VentureSource: Half of U.S. Venture-Backed Companies that Held IPOs in Third Quarter Went Public Overseas; Median Paid for Acquisition Spikes to $100M

Oct 03, 2011, 07:00 ET from Dow Jones & Company

NEW YORK, Oct. 3, 2011 /PRNewswire/ -- The liquidity markets for venture-backed start-ups tightened in the third quarter, according to Dow Jones VentureSource. Ten U.S.-based venture companies went public in the third quarter but the pace of initial public offerings (IPOs) slowed dramatically, from six in July to four in all of August and September. During the third quarter, 122 venture companies completed a merger, acquisition or buyout, netting $13 billion, a 17% drop in deals compared to the same period last year.

"Exiting a venture-backed company in today's market requires patience," said Jessica Canning, global research director for Dow Jones VentureSource. "Cash-rich corporations will continue to spend cautiously until the global markets stabilize enough to provide assurance that their cash on hand is an unnecessary security blanket. Meanwhile, IPO candidates continue to file with hopes that the markets will stabilize or that they can find an exit overseas."

Currently, 61 U.S. venture-backed companies are in IPO registration. Twenty-seven of those companies filed during the third quarter.

Volatility in U.S. Markets Sends IPO Candidates Overseas

Ten companies raised $505 million through public offerings in the third quarter, one more IPO than the same period last year when nine offerings raised $559 million. Half the companies that completed an IPO in the third quarter went public on exchanges in Asia and Europe, a stark contrast to the first half of 2011 when all 25 venture companies that went public listed on a U.S. exchange.

The median amount of venture capital raised prior to an IPO dropped 49% to $26 million in the third quarter. The median amount of time it took a company to reach liquidity fell to 6 years from 6.7 years in same period last year.

Consolidation in Enterprise Technologies Drives Acquisitions; Median Paid Spikes

In the third quarter, corporate acquirers bought 116 companies for $12.4 billion, a 16% drop in M&A activity from the same period last year when 138 acquisitions netted $8.2 billion. Despite the drop in deal activity, the median price paid for a company more than doubled to $100 million.

"M&A prices picked up as technology companies sought new products and services to fuel growth against the backdrop of a promising IPO market," said Scott Austin, editor of Dow Jones VentureWire. "However, with the IPO market cooling all bets may be off for the rest of the year."

Buyouts of venture-backed companies by private equity firms also tracked below the same period last year. Private equity firms bought six venture-backed companies for $560 million in the most recent quarter, down from the same period last year when private equity firms bought nine companies for $872 million.

Interest in enterprise technologies drove deal activity in the third quarter. The Information Technology industry saw the most consolidation as 57 M&As and buyouts netted $6.4 billion. The Business and Financial Services industry was the second most active industry as 26 deals netted $2.8 billion.

To reach an M&A or buyout, companies raised a median of $18 million in venture financing, 23% less than the same period last year, and took a median of 5.7 years to build their company, more time than the 5.1-year median in the third quarter of last year.

The largest M&A deal in the third quarter belonged to PopCap Games, a Seattle-based developer of online games, which was acquired by Electronic Arts for $750 million.

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