Last week was a good week for venture-backed exits.
OpenTable and SolarWinds launched public offerings, and the companies performed well in their public market debut. OpenTable’s run-up marked the largest first-day performance for a U.S.-based venture-backed IPO in more than 18 months.
Meanwhile, Bellaire, Texas-based MedServe Inc., a provider of medical and hazardous waste disposal and collection, was bought for $185 million. It was one of several recent VC-backed exits, which included ad-serving company Kiptronic Inc. and IT control solutions provider Solidcore Systems Inc.
So you can understand why industry observers are beginning to wonder if the exit markets are thawing.
But it’s too soon to uncork the champagne, says Paul Deninger, vice chair of the investment bank Jeffries & Co.
“Four [venture-backed] deals [in Q2] don’t constitute a thawing of the IPO market,” he says. “When we have a relatively consistent, stable, uplifted Nasdaq for two quarters, that’s when the M&A market will pop. That’s when corporate buyers will realize that the knife isn’t falling anymore.”
In fact, despite the recent uplift of several VC-backed acquisitions, M&A activity is way off from last year, according to Thomson Reuters (publisher of PE Week). To date in the second quarter, 23 deals involving venture-backed companies have officially closed. Six had disclosed values totaling $475 million. In comparison, in the second quarter of last year, 84 deals closed, 26 of which had disclosed values that totaled $3.29 billion.
Yet many buyers appear eager for a turnaround. For example, Yahoo Chief Technology Officer Ari Balogh told conference attendees last week at the Reuters Global Technology Summit that Yahoo is looking to buy companies that will allow it to become a bigger player in social networking.
Citing valuations that have fallen dramatically over the last nine months, Balogh said, “I can guarantee you there will be some acquisitions.”
Others are waiting for prices to fall further.
“There’s tons of interest in transactions, and tons of preliminary negotiations and due diligence happening,” says Deninger.
The reason more deals haven’t gone through is a continuing disconnect between the “expectations of sellers and what buyers are willing to pay,” he says. “Sellers are saying: ‘Unless I desperately need to sell in this environment, why would I?’”
Bart Schachter, a managing director with Blueprint Ventures, knows that mentality all too well.
“The market is tough. We did OK,” says Schachter, whose firm invested in Kiptronic’s $4.1 million Series A in 2006 with Prism VentureWorks and an undisclosed firm.
The M&A market right now “is pretty brutal. It’s a buyers’ market,” Schachter says.
On the IPO front, however, last week’s offerings bring the total number of U.S. IPOs this year to seven. The prior week saw the largest private equity-backed IPO of the year, with Longmont, Colo.-based satellite imagery provider DigitalGlobe Inc. raising $280 million in a 14.7 million share offering.
OpenTable (Nasdaq: OPEN) made its market debut Thursday, pricing its 3 million share offering at $20 a share, above the anticipated range of $16 to $18. Shares soared in first-day trading, closing up 60% at $31.89.
The first-day performance was all-the-more stunning considering that it occurred on an otherwise bearish day for the broader markets, with the Dow Jones Industrial Index registering a 130-point tumble.
San Francisco-based OpenTable, which runs a website for making restaurant reservations and sells table management software, filed to go public in late January, in an offering underwritten by Merrill Lynch & Co., Allen & Co., Stifel Nicolaus and ThinkEquity. Since it’s founding in 1998, the company has raised nearly $69 million in venture funding, according to Thomson Reuters.
Venture investors also owned a majority of the company. At the time of the IPO, the companies largest stakeholders were Benchmark Capital Partners (26% stake), Impact Venture Partners (17.5%), IAC/InterActive Corp. (11%) and Integral Capital Partners (7.5%).
SolarWinds (NYSE: SWI), which made its IPO debut on Wednesday, also closed up in first-day trading. The Austin, Tex.-based developer of network management software priced its 12.1 million share offering at $12.50, slightly above the anticipated range. The stock closed up 10% in first-day trading at $13.75.
Prior to the offering, SolarWinds had raised $62 million in venture funding from Insight Venture Partners, Bain Capital and Austin Ventures. At the time of the offering, Insight was the largest stakeholder, with 31.5% of the company, or 14 million shares, followed by Bain with a 25.5% stake.
Meanwhile, there may be more companies ready to launch IPOs. A number of companies that had filed to go public early last year, before the market downturn intensified, have submitted amended IPO filings in recent weeks.
Prometheus Laboratories, a developer of diagnostic products and which raised $73 million in venture funding between 1996 and 2001, filed an amended IPO prospectus last week. The San Diego-based company, which has been profitable for the past three years, did not specify how much it seeks to raise in the planned offering.
In early May, Omeros, a biopharmaceutical company, filed an amended prospectus for a public offering it also initially proposed a year ago. The company, which posted a loss of $5.5 million in the first quarter, didn’t specify how much it plans to raise.
Omeros, which develops treatments for inflammation and central nervous system disorders, has been in business since the mid-90s and raised $79 million in venture funding, according to Thomson Reuters. ARCH Venture Partners is the only one listed as a significant shareholder, with a 5% stake in the company.
In addition, Nexsan Corp., a provider of energy-efficient disk-based storage systems, filed an amended IPO prospectus for an offering on Nasdaq. The Thousand Oaks, Calif. company made its initial filing for an $80.5 million offering in April of last year.
Blueprint’s Schachter notes that a resurgence in IPOs could bode well for more M&A activity.
“If the IPO market resumes, it could shift market power toward sellers a little bit more [in the M&A market],” Schachter says.
Even if that happens, though, the IPO market would have to remain healthy for a good six to 12 months for it to help sellers in trade sales—and that’s only in regard to those companies that could potentially go public, Schachter says.