We’re halfway through 2016 and there have only been two initial public offerings from tech companies this year. That’s right, two – Twilio, an unprofitable cloud communications platform, and Dell’s cyber-security spin-off, SecureWorks, which opened the market at $13.89 after pricing at $14 a share despite an expected range between $15.50 and $17.50.
Buyouts, on the other hand, have taken center stage.
Take for example software giant Oracle’s purchase of project management software firm Textura for $663m and follow-up buyout of software-as-a-service firm Opower for $532 million. Then there’s Microsoft which bought third party keyboard company SwiftKey for $230 million and followed that up by purchasing Italian Internet of Things startup Solair for an undisclosed sum.
Private equity has also been having a field day.
“In the last 12-18 months, private equity had $15 billion dollars going after tech companies with total dry powder available sitting between $300 and $400 billion,” said Richard Davis of Canaccord Genuity told TechCrunch. “In theory this is enough to take every software company on the planet private, except giants like Microsoft.”
So what’s going on?
It’s easy to say the IPO sphere is a frozen wasteland compared to the volume of tech heavyweight IPOs last year – which included, might we remind you, Square, Shopify and Box. And while six technologies had already priced their IPOs, raising a total of $1.6 billion by end of April 2015, the chill really began in the second half and wasn’t just pointed at the tech sphere.
Only 51 IPOs priced, the lowest group since 2012, according to Proskauer’s Capital Market Group 2016 IPO study. In fact, last year’s annual aggregate deal value of $30.1 billion was the lowest since 2009. The unicorns, mega-IPOs for companies valued over $1 billion, were also elusive with just two compared to 2014’s 16 IPOs.
It’s not internal – IPOs are ripping through the Securities and Exchange Commission faster than previous years with the average number of first-round SEC comments decreasing 29 percent between 2013 and 2015 according to the Proskauer report. But the time taken from first submission to pricing grew from 124 days in 2014 to 149 in 2015.
The hesitation, as many have pointed out, likely stems from market volatility. The mega IPO exit that so many startup teams dream of seems to be losing its allure for more stable private equity or corporate buyout options.
Maybe it isn’t either/or
But Steve Foerster, a Professor of Finance at Western University’s Ivey Business School says the trend may be far simpler than many think.
“There tend to be cycles of hot and cold IPOs,” he told The DealRoom, pointing to the pronounced peaks when a large number of IPOs were issued – the late 1960s, the early 1980s, the mid- to late-1990s which coincided with the major spate of tech IPOs – followed by the troughs which obviously includes the tech bubble around the financial crisis.
“I suspect that we’re still in the lower end in terms of IPO cycles,” says Foerster.
He says he wouldn’t view buyouts as a replacement for IPOs.
“When you think of why a company would want to IPO, the primary benefit is usually to be able to raise capital, the secondary benefit might be liquidity of having shares publicly traded and so that makes it attractive,” says Foerster. “But if a private firm or a startup is able to raise funds without having to go the IPO option… then there’d be less urgency in terms of IPOing.”
In other words: if they don’t need the liquidity of the shares and can raise the money they need from private investors, why not?
“In some ways it’s less onerous than being in the public spotlight,” says Foerster. “Obviously there’s been a lot of critiques of short-termism and once companies are public the focus is on what quarterly results are – there’s less worry of that from a private company perspective.”
Break the precedent
It keeps pace with the trend towards last year’s spike in downrounds. As the panel for our mid-market report on the valuation gap pointed out, things were getting a bit out of control.
“In the tech world, you frequently see companies being sold on unrealized potential – certain buyers are willing to gamble that what they are purchasing is going to be the next Google or the next Uber, which can result in very high sell-side valuations,” wrote Andrew Lucano, a partner in the New York office of Seyfarth Shaw LLP and Vice Chair of Seyfarth’s Mergers & Acquisitions practice group.
Maybe the growth in buyouts truly is the tech industry coming to terms with reality? And in a market where no one seems to want to continue the lackluster trend set by Twilio and SecureWorks, maybe a buyout is the safest exit, even if it means less cash in hand.
“If you’re in a so-called bear market then nobody is really enthused with stocks so whether they’re new stocks or old stocks, you’re not going to get the attention you would in a rising market,” says Foerster.
While IPOs have traditionally been a key way for exiting, buyouts don’t necessarily preclude a firm from spinning out and issuing an IPO down the road. It just means all those startup founders chasing the unicorn exit status can leave with their humility intact.
“If there is a buyer, they’re just happy to be able to get their money out,” says Foerster.
