bi-weekly column with timely,
relevant and possibly irreverent
insight into the BC technology
June 13th, 2008
Greenstone Venture Partners
“What goes up,
Must come down,
Got to go round...
Drop all your troubles
By the river side,
Ride a painted pony
Let the spinning wheel fly.”
– Blood, Sweat and Tears,
It’s Friday the 13th when this column
gets published. Not that I’m superstitious. Given the
tumultuous capital markets, $1.50 a litre gasoline,
softer housing market (here, in the US it’s downright
flaccid) and the unbelievably crappy weather we had all
spring, what’s not to like about our luck? It’s going
to turn soon, right?
This seemed like a good day to talk about making
money. Specifically, I wanted to focus on your
company’s big IPO or the 9 figure M&A exit that you are
working so hard to accomplish. Why today? Well, there
is some luck needed to get the big win... and you
usually win by being a bit of a contrarian to
conventional wisdom. So, put the two together and I am
happy to talk about your good fortune on Friday the 13th.
Here are some current facts:
The number of technology IPOs on the NASDAQ or NYSE last
year was 68. So far in 2008, five. BC’s only
technology IPO of 2007 was Day4 Energy.
technology and communication M&A in the US to the end
of May included 590 deals, compared to 680 for the
same period in 2007.
IPOs have clearly slowed after a decent 2007 and M&A
is not quite where it used to be (the picture is
somewhat worse when you do the comparison to last year
by dollar value). What drives these swings? When is
the timing right to go out and seek a buyer or an IPO?
IPOs are driven by the economy and the notion of
supply and demand. The economy sometimes trumps a
market with a good supply of strong companies attacking
big markets. The appetite for growth companies affects
demand as does performance of recent issues. When you
are in a market with no recent issues, market
instability and macro economic uncertainty shrinks
demand. That’s where we are right now. Even though
everyone I talk to thinks we have a pipeline of IPO
worthy companies in technology in the US and Canada.
What is IPO worthy? Depends on where you are going
public... For the big boards, TSE, NYSE and NASDAQ, you
likely need a quarterly revenue run rate of $8-10M or
more, projecting above $30-40M in the next 12 months.
If you are a revenue generating company (life science
and clean tech are different, they are speculative
plays) you probably need strong earnings or the start of
strong earnings. The longer we have this drought of
IPOs, the more companies will have grown and these
numbers will be higher for a time...
The biggest issue facing IPOs is that the NASDAQ
(proxy for technology) has had no net gain since the
beginning of 2006. It has been up and down and all over
the place giving no confidence to buyers of new issues.
This translates into net fund outflows from public
markets. To wit, net 2007 flow was -$40B (and that was
a good year for IPOs) while the first quarter of 2008
was massively negative (-$64B). While this looks bad
for public equity funding, it pales in comparison to
$350B in market capitalization removed from the market
since the end of 2006 by M&A and take private
transactions! So people trading are taking money out
and the consolidation of the technology industry is
taking 7-10x that value out of the market. At some point
the money will flow back in, but when?
If you are targeting an IPO for the early 2009, you
might be OK. After the presidential election and six
more months with little or no IPOs, the door will open
and next year might be a very good year.
So, you want to be acquired instead. Well, 90% of
venture backed companies that exited successfully in
2007 were through the M&A route. Here’s what drives
demand for M&A:
Buyer’s near term outlook
concentration in the market
technology or architecture shifts
age old dilemma: Build vs Buy, which is really about
Technology companies didn’t benefit as much from the
bull run in private equity take-outs fuelled by cheap
debt. The vast majority of buyers of private technology
companies are public technology companies and the reason
for buying is usually strategic, not financial. Of the
factors mentioned above, the economy and the individual
public company’s ability to drive good news in this
economy, are the biggest determining factors in M&A at
the moment. But the biggest issue in my mind (that will
not go away any time soon) is buyer concentration.
In March 2000, there were 5,181 companies on the
NASDAQ. Today, there are 3,135. That is a 34% decline
in the number of potential buyers for you. It is worse
in software: There are 48% less enterprise software
companies now than in 2000. For example, BEA Systems
bought 7 companies in 2006 and 2007. Oracle bought BEA,
taking out a fairly active buyer. Will private equity
firms step in and fill the gap? They may because you
young private companies are growing and getting
impressive earnings. If the IPO market won’t take you
and the public technology companies are less active, PE
may step in. They have gobs of capital and may try
consolidating certain technology sectors or buy and hold
waiting for an IPO market to return. But, PE buyers are
going to pay less than public technology companies.
They want to make their return, remember.
As always in technology, the wheels of innovation
keep turning. Major technology shifts force companies to
acquire or get left behind in a new technology. Mobile
continues to drive innovation and web 2.0 has yet to
have a Youtube like follow up acquisition.
Virtualization is hot, as is SOA. There are many
others. Big companies don’t have the expertise in house
and will acquire that expertise because technology
markets shift so quickly. Generally, they don’t have
time to build it. To me this is the biggest driver in a
concentrating buyer market.
The window for M&A is not closed at all. It may
have slowed in 2008 because of the overall economy, but
lately it is picking up again.
It may be Friday the 13th, but the news
is not gloomy.
What Do You Think? Talk Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
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