August 6, 2012

M&A Will Surge Off of Facebook’s IPO Stumble

Ash Sethi – Analyst, MergerTech

For the foreseeable future the technology IPO market will be under the specter of Facebook’s public offering cataclysm.  While Facebook was hardly the first technology IPO to falter in the last eighteen months, its fall was by far the most public and has left technology entrepreneurs and investors seriously re-thinking the wisdom of an IPO exit.

Online legal services company, a growing company whose sales have increased year-over-year, today announced it was delaying its initial public offering due to hostile equity market conditions–and they are hardly alone.  Cloud software provider E2open priced its IPO at $15 on July 26, but immediately traded down.  Highly profitable Avast Software recognized that even cloud services companies, which are still fetching prime valuations in the M&A market, are facing a bearish equity market and joined thirteen other technology companies which have cancelled their IPOs outright since Facebook went public.  That’s a 40% increase in scrapped IPOs from the same period in 2011.

While it’s unfair to blame only Facebook (or Greece) for this toxic equities market, no business owner wants to sell shares of their company in a climate of falling prices.  This crisis of confidence in the public markets is eating up billions in value as more investors become reluctant and skeptical about offerings even from healthy companies in high-growth sectors.

This atmosphere emphasizes the advantages of the M&A market, as large, highly-mature tech companies seek to fill strategic, tactical, and technological gaps.  Private company valuations are resilient enough in these economic conditions that selling to a larger entity remains an attractive financial proposition.  Buddy Media, a five-year-old social startup was recently acquired by cloud computing powerhouse for over $800 million.  Salesforce also bought social media monitoring platform Radian6 for $340 million in only its fifth year of operation.

Even profitable social and software services companies still planning to go public in the post-Facebook era are going to be fighting an unforgiving tide of a shaky economic climate.  There are still a significant number of investors who were burned very badly by the dotcom crash of 2000, and that lingering cynicism of yet to be profitable technology firms coupled with a bearish economic outlook means that more and more companies will be looking towards other means of financing and rewarding its investors.  Over the next twelve months, look for much more conservative pricing in those still committed to an IPO track, greater private placements and M&A deals, and added financing rounds for those not willing to bet their entire company on public market sentiments.