M&As Lag as Public Markets Warm Up to Venture-Backed Companies

Dow Jones VentureSource: Consolidation Among Start-ups Accounted for 9% of M&As

IPOs in Double-Digits for Three Consecutive Quarters for First Time Since 2007

As the public markets warm up to venture-backed companies, corporate acquirers are pulling back. In the second quarter of 2011, 109 venture-backed companies achieved liquidity, netting $11.2 billion, according to Dow Jones VentureSource. That represents a 13% decrease in exits and 26% increase in capital raised from the second quarter of 2010.

"Deal-making is in a limbo– unstable global markets and sky rocketing IPO valuations are giving both acquirersand companies sufficient cause to wait,” said Jessica Canning, director of global research for Dow Jones VentureSource. “Everyone is watching the performance of recent IPOs to see how justifiable valuations really are.”

Consolidation Among Venture-Backed Companies Accounted for 9% of M&As

In the second quarter, acquirers bought 91 companies for $9.2 billion, a 13% drop in M&A activity from the same period last year when 105 acquisitions netted $7.2 billion. Information Technology (IT) was the most active area for acquisitions. Driven by interest in Software companies, the IT industry saw 38 M&As net $3 billion. Consumer Services, which includes consumer Web companies, was the second most active industry for acquisitions as 21 companies were bought for $2.1 billion.

While most M&As involved corporations buying venture-backed companies, eight start-ups sold themselves to other venture-backed companies, accounting for 9% of the quarter’s M&As.

"Consolidation is happening within the venture ecosystem as companies like Zynga, Jive Software and others pursue significant growth while still privately held,” said Ms. Canning.

Buyouts of venture-backed companies by private equity firms also tracked below the same period last year. Private equity firms bought four venture-backed companies for $283 million in the most recent quarter, down slightly from the same period last year when private equity firms bought five companies for $832 million.

The $64 million median amount paid for a venture-backed company in the most recent quarter was slightly less than the $66 million median in the same period last year.

To reach an M&A or buyout, companies raised a median of $19 million in venture financing, on par with the same period last year, and took a median of 5.6 years to build their company, slightly more time than the 5.5-year median in the second quarter of last year.

The largest M&A deal in the second quarter belonged to Berkeley, Calif.-based Plexxikon, a developer of small molecule pharmaceuticals, which was acquired by Daiichi Sankyo for $805 million.

IPOs in Double-Digits for Three Consecutive Quarters

Fourteen venture-backed companies went public in the second quarter, raising $1.7 billion, a slight drop in activity from the 15 IPOs that raised $859 million during the same period last year. With a total of 25 IPOs in the first two quarters, however, IPO activity is tracking ahead of the first six months of 2010, and for the first time since 2007 IPO activity has been in double-digits for three consecutive quarters.

"IPOs have been steady but the window has yet to fling wide open,” said Scott Austin, editor of Dow Jones VentureWire. “Despite talk of tech bubbles and excitement around offerings from Internet companies like LinkedIn and Pandora, macroeconomic issues could keep a tight hold on the IPO window as investors may be encouraged to stick with safer securities.”

Currently, 45 U.S. venture-backed companies are in IPO registration.

The median amount of venture capital raised prior to an IPO rose 55% to $109 million in the second quarter of 2011. The median amount of time it took a company to reach liquidity fell to 8.6 years from 9.3 years in same period last year.

For information on Dow Jones VentureSource’s research methodology, visit http://bit.ly/VSFAQs. For general information about Dow Jones Private Markets, visit http://www.dowjones.com/privatemarkets.