Growing Tech Mergers May Signal Robust IPO Market - InformationWeek

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Software // Enterprise Applications

Growing Tech Mergers May Signal Robust IPO Market

Robust merger-and-acquisition action among venture-capital-backed tech companies last quarter could serve as a harbinger of increased initial public offering activity later this year.

Of the 78 venture-backed companies involved in mergers or acquisitions during the first three months of this year, 58 are IT companies, according to an analysis by VentureOne, a provider of VC-investment information. Those deals include CheckPoint Software's $236 million acquisition of Zone Labs, Network Appliance's $300 million acquisition of Spinnaker Networks, and VeriSign's $135 million acquisition of Guardent. At 74%, that's the highest percentage of IT M&A activity among VC-backed companies in four years. Still, only one VC-backed IPO occurred during the first three months of the year.

Noticing bigger companies acquiring these startups convinces public investors of the value that venture-backed IT firms offer, says VentureOne research manager Amity Wall, who sees the M&A deals spurring interest among investors to buy stocks in IT startups through IPOs. "Through these acquisitions, corporations validate the value of these [VC-backed] companies," Wall says.

Other factors, though, could continue the damper that's limiting tech IPOs, including the lackluster performance of stocks this year. Last year's 25% runup in stocks gave companies acquiring VC-backed venture firms the equity needed to complete their deals, says Fred Wainwright, executive director of the Center for Private Equity and Entrepreneurship at Dartmouth University's Tuck School of Business. If that market rally hadn't stalled, he says, tech IPOs may have made a comeback.

Another factor that limits IT IPOs: lackluster spending by companies on technology. Since the dot-com collapse, corporate IT budgets have been flat.

Investors also remain gun-shy on IT companies because of the losses experienced when the dot-com bust occurred. "A lot of people got burned," Wainwright says. "There's definitely an echo effect."

Plus, the war in Iraq and increasing terrorist activity make investors jittery. "It's difficult to plan ahead with any confidence," Wainwright says. "People are just going to be very conservative--they won't take any risks."

If Wainwright is right, companies such as Atheros Communications will remain the exception. Atheros was the only tech IPO last quarter. The 6-year-old chipmaker for wireless networks raised $126 million in February, the second-largest IPO of the quarter. The other nine first-quarter IPOs involved health-care companies. With an aging population, investors see healthier margins in health care than in IT.

Last quarter's biggest acquisition by a publicly traded company of a VC-backed firm was January's purchase for $625 million by storage company EMC Corp. of VMware, a developer of virtual-computing software for Intel-based computers.

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