Posts Tagged ‘America’s Growth Capital’

What To Do During This Long Economic Winter as Deal-Making Grinds to a Near Halt

March 9, 2009

Today, Creative Capital is publishing a guest commentary from M. Benjamin Howe, Chief Executive Officer of the Boston-based investment bank America’s Growth Capital.

Here is the introduction to a longer report.

What To Do During This Long Economic Winter

While opinions on the best path to economic recovery differ dramatically, there is little argument that the uphill climb will be even greater than it appeared just one month ago. Since our 2008/2009 Capital Markets Perspective was published in January, activity across all transaction types (M&A, Private Placements, PIPEs, IPOs, etc.) shows significant declines in all business areas and industries from the already painful levels of 2008. (See Attachment.)

Wall Street transaction activity, including global technology, is down 50% year-over-year, down 60% compared to 2007, and down even more on a dollar-value basis. (See Page 2.) So far this year, only 6 out of roughly 400 M&A global technology transactions have had values of $100 million or greater.

On the technology financing front, there have been no follow-on offerings or IPOs, and there have been only 11 PIPEs and 91 Private Placements of $5 million or greater YTD, as compared to 37 PIPEs and 190 Private Placements in the same time period last year. We expect technology transactions for 2009 and the foreseeable future to be dominated by $2-$30 million private placements, some PIPEs, very few public offerings, and M&A transactions valued between $1-100 million – which we believe will comprise 90% of disclosed M&A transactions.

The top 11 technology giants have only announced 8 deals YTD (compared to 16 at the same time last year), while the top 15 Financial Buyers of technology have yet to do a deal! Strategic and Financial Buyers have the cash for acquisitions and are attracted to the depressed valuations (public valuations have dropped over 50%), yet have been reluctant to deploy capital as these valuations have continued to fall.

This drop in transaction activity, however, cannot be solely attributable to buy-side participants. Company management teams and their private and public shareholders are hesitant to sell given battered valuations and are generally opposed to relinquishing control (and their current income) during these turbulent times. Even in this difficult economic environment, top quartile technology companies will continue to successfully draw from the tens of billions of dollars in venture capital and growth equity.

While the economic recovery will clearly take longer, within our business we are already starting to see the beginning of a recovery in M&A activity and believe the second half of 2009 will be dramatically stronger than the first half.

In one of the best buyers’ markets in decades, it’s obviously not a great time to sell your business. Still, for some companies, an exit may be necessary or will just make sense. What will not make sense is sitting on your hands in hopes that the storm passes sooner rather than later. Venture capital and private equity players should fund and grow aggressively the top 20% of their portfolios, fund and grow cautiously the middle 50%, and unload when possible the bottom 30%. Consider these initiatives as we try to weather the economic crisis:

1) Trade growth for profitability – strategic partners are placing increased importance on operating efficiency and profitability, even at the expense of top line revenue growth. Start or continue to take the difficult actions to accelerate the path to profitability. This includes actions involving customers, partners, channels, and employees.

2) Educate the most likely buyers about your business – find ways to get in front of the best buyers and let them know what you are building without giving away the secret sauce or putting up the “For Sale” sign. (See Page 3.) Get creative and aggressive. Expand your horizons and leverage your Board, investors, bankers and lawyers to make these introductions.

3) Become familiar with relevant, large, private equity-backed companies – many of these companies have cash on their balance sheets and mandates to buy. (See Pages 8-9.) Do more homework. There are always companies out there that you have never heard of, and one of them could be a good buyer for your business.

4) Go on the offensive – actively seek acquisitions or logical merger-of-equal partners to enhance your strategic positioning coming out of the recession. Turn up the heat on Business Development/Marketing to generate new candidates and get meetings. Consider stock deals if access to cash is limited.

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Tech IPOs: Can the Visa Offering Revive a Near-Dead Market?

March 25, 2008

OK, it looks like I was mostly wrong about tech IPOs this year. In my post on Jan. 8, I predicted that “it will be another year of growth for tech offerings, but the growth won’t be on the order of last year’s 46% surge. We’ll be fortunate to see 10% to 20% more tech IPOs in 2008.”

This year, there have been only 12 IPOs (and three tech IPOs), a precipitous 70% drop from 37 pricings for the same period in 2007, according to America’s Growth Capital. For now, it looks like 2008 will see a big drop in tech IPOs compared to the previous year.

So what went wrong? One word: RECESSION. At least I was smart enough to flag this possibility in my post when I said: “There is one caveat to my prediction: If the economy veers into recession all bets are off.”

Over the last three months, the economy has continued to deteriorate more than I expected. I don’t think anyone saw the collapse of a Wall Street investment bank when the subprime mess emerged last summer. That’s a damn big wingtip that just dropped. You have to wonder what other surprises are lurking in the shadows. Fact is, the shadow economy of derivatives, collateralized debt obligations and other bizarre new types of securities is far more pervasive and risky than anyone realized. Now, we’re dealing with the aftermath of this deluge of financial toxins.

Of course, I am still hopeful that the economy will strengthen in the second half of the year–and that could lift the number of IPOs. But it’s hard to be bullish on new issues right now with all this uncertainty.

Another factor keeping the IPO windows shut: The media after-market performance for all 2007 and 2008 IPOs has turned negative to -3%, while tech IPOS are down 10% in the same period, with almost two thirds below their offering price, according to America’s Growth Capital.

So will the super-successful VISA offering revive the IPO market? Probably not. For now, it seems like more of an exceptional case than a harbinger of good times to come.

Tech Dominated by M&A–not IPOs

January 9, 2008

A few days ago, I offered readers my forecast for tech IPOs in 2008. But in many ways, the real action–and most realistic exit strategy-for the lion’s share of startups is to be swallowed by some bigger fish. This point was driven home to me when I saw a recent end-of-year M&A report from America’s Growth Capital. Last year, there were 307 tech mergers or acquisitions, down 19% from 381 in 2006. That compared to 60 tech IPOs–a ratio of about 5 to 1.

The disparity in the importance of the IPO market and the M&A market really becomes clear, though, when you look at the value of the transactions. Last year, as of 12/19, there was $203 billion worth of tech M&A deals, compared to just $7 billion in capital raised through IPOs. That’s a ratio of 31 to 1!!!

Merger Chart

Although the number of tech mergers declined, the value of those transactions soared 46%. The main reason? The explosion of huge private equity buy-outs. The number of tech deals exceeding $1 billion soared 38% last year. And four out of the top 10 largest deals were handled by private equity shops: Kohlberg Kravis Roberts acquired First Data, Silver Lake Partners bought Avaya, Madison Dearborn Partners scooped up CDW and The Blackstone Group took over Alliance Data Systems.

So what does this portend for 2008? With the private equity biz in a deep freeze, I would expect that we’ll see a significant decline in both the number of deals and the total value of transactions. That leaves good ol’ corporations as the main predators.

The prevailing business model, er, I mean, fantasy in Silicon Valley today is to be acquired by Google. But Google is not the most acquisitive tech company. Here’s the list of top 10 acquirers in 2007:

Microsoft (17)

Cisco (15)

Google (14)

Oracle (12)

EMC (12)

Hewlett Packard (11)

IBM (11)

Interactive Corps (9)

Yahoo! (6)

Nuance (4)

eBay (4)

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2008: A Good Year for Tech IPOs?

January 7, 2008

Will 2008 be a good year for tech IPOs? Last year, I correctly predicted that 2007 would be the best year for tech IPOs since the tech bust. We ended the year with 60 tech IPOs, up from 41 in 2006, according to data from America’s Growth Capital. This year, I am predicting it will be another year of growth for tech offerings, but the growth won’t be on the order of last year’s 46% surge. We’ll be fortunate to see 10% to 20% more tech IPOs in 2008.

There is one caveat to my prediction: If the economy veers into recession all bets are off.

In my story published in January 2007, I argued that “a steadying of interest rates and inflation, a recent rally in the tech-heavy NASDAQ, and exceptional performance of tech offerings since the summer of 2006″ all pointed to a record year for tech IPOs.

None of those factors have changed that much. Inflation remains low, interest rates are falling again. Tech shares have experienced the best after-market performance of any IPO category, around 28% through the end of October. And some of the year’s biggest stock market winners were new tech names, such as VMWare, Omniture, and more recently, NetSuite.

Moreover, the Silicon Valley dream of changing the world and striking it rich is more alive than ever. I ended my 2007 story by quoting NetSuite CEO Zach Nelson, who affirmed this point. “Entrepreneurs don’t found a company to make Google better,” says Nelson, CEO of software provider NetSuite Inc., which recently chose an investment bank for an expected 2007 IPO. “They found a company to make a mark on the industry.” Now that NetSuite went public in late December, Nelson is worth around $40 million on paper.

Not everyone agrees with me, of course. The founding ceo of America’s Growth Capital, Ben Howe, thinks 2008 won’t be a growth year for tech IPOs. Howe, a key source in my 2007 forecast, argues we will see a decline from 2007, which he believes is already evident from the significant drop in new filings in Q4 2007. “Weak economy, choppy capital markets, political uncertainty will all work to slow down the IPO market,” writes Howe.

What do you think? This could make for an interesting thread.

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