Yes Virginia, there is a venture capital-backed IPO market.
Nine venture-backed companies raised $732.8 million through IPOs on U.S. exchanges last quarter, which is more than was raised during the previous four quarters combined, according to data from Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.
After an IPO drought that followed the bursting of the technology bubble, the number of IPOs is not only up, their value is healthy, too, suggesting that the resurgence in IPOs could continue to pick up steam.
The average post-offering value for the quarter was more than $3 billion, which is an enormous leap from the $695 million post-offering value of the previous quarter.
“The market certainly has opened up, although it’s opened up selectively for companies that are making money,” says Steve Friedman, a general partner with New York-based Eos Partners. “I think that a lot of people had companies doing well over the last year, and basically made sure that they were ready when the market started to improve.”
Friedman was one of those people. In 1997, Eos led a $12 million investment in an Agoura Hills, Calif.-based digital audio company named Digital Theater Systems Inc. The deal came with a post-money valuation of approximately $27 million, and a board seat for Friedman.
Following an additional funding round and the establishment of a cash-flow positive balance sheet, Digital Theater filed in April 2003 for a $65 million IPO. Once it actually hit the Nasdaq on July 10, the company was valued at over $314 million. Like each of the other eight VC-backed IPOs that would follow it during the last three months, Digital Theater ended the quarter on an up-note even though the overall market indexes had declined.
The average bump in the IPO aftermarket was 16%, while the largest increase belonged to iPass Inc. The Redwood City, Calif.-based provider of enterprise networking software saw its stock rise from its July 24 offering price of $14 to a quarter-end mark of $23.50. Also scoring particularly big was Fremont, Calif.-based InterVideo Inc., which closed the quarter at $21.45 per share after joining the Nasdaq at $14 per share on July 17.
The quarter’s largest VC-backed offering was a $150 million deal from SigmaTel Inc., an Austin, Texas-based maker of integrated circuits for consumer audio products and wireless and broadband infrared applications. The company had been valued at just under $37 million following an $8.2 million capital infusion in March from investors Battery Ventures and INVESCO Private Capital.
VCs weren’t the only group to enjoy a healthy third quarter for new public offerings. The buyout-backed IPO market also rebounded, following a second quarter that witnessed not a single buyout-backed offering. Six buyout-backed companies priced IPOs on U.S. exchanges between July and September for a total take of $2.12 billion. Both this and the VC totals were part of a larger IPO market rebound in which 22 companies hit public market paydirt after just eight companies had done so in the previous six months.
Leading the buyout-backed pack was AMIS Holdings Inc., which is known to end-users as AMI Semiconductor. The Pecatello, Ind.-based company was founded in 1966 to make application-specific integrated circuits and was owned by a subsidiary of Japan Energy Electronic Materials Inc. until Citicorp Venture Capital and Francisco Partners paid $525 million for an 80% stake in early 2000. Japan Energy still owned a 20% stake prior to AMIS’ IPO on Sept. 24, which netted $600 million through the sale of 30 million common stock shares at $20 per share.
What is particularly interesting about AMIS, however, is that its top dog status does not carry over into its public market performance. In fact, AMIS is the only buyout-backed company to complete a Q3 2003 IPO and be trading below its offering price by market close on Sept. 30. AMIS sunk to $18.49 per share by the quarter’s end, while companies like Citadel Broadcasting and Anchor Glass Container Corp. were experiencing bumps over the respective launches.
The strongest riser to date was CapitalSource Inc., a Chevy Chase, Md.-based provider of senior and mezzanine loans through three focused business units. The company priced 21.3 million shares on Aug. 9 at $14.50 per share, and had seen that mark increase to $17.50 per share by Sept. 30.
It is important to note, however, that CapitalSource is one of four companies included in the Q3 2003 buyout-backed IPO totals that never experienced an actual buyout. Instead, companies like CapitalSource – plus National Financial Partners Inc. and Axis Capital Holdings Ltd. – were formed from scratch by buyout firms for the purpose of creating operational acquisition platforms.
In other words, CapitalSource owners like Fallaron Capital Management or Madison Dearborn Partners never bought CapitalSource from a previous owner. Instead, they invested hundreds of millions for significant stakes in what basically amounts to a startup. The “buyout-backed” designation is given by Thomson Venture Economics because the capital pool that supported CapitalSource and others comes from firms that predominantly engage in buyout activity.
But don’t cry for the VC market, which did just fine in the Q3 IPO market even without companies like CapitalSource.
In a report co-authored by the National Venture Capital Association, Thomson Venture Economics reports that nine VC-backed companies completed IPOs last quarter for a grand total of $732.8 million. This is up significantly from the $164 million raised by just two venture-backed companies the previous quarter.