As Investors Tire of Net Offerings, Firms Are Retooling Their Exit Strategies
If the 1990s were the age of Internet IPOs, you might call the early 21st century the era of Internet M & As.;
At least, that’s what some observers are predicting as the technology arena grows increasingly crowded and investors tire of pumping money into flashy Internet startups that have no obvious intention of ever producing a profit.
With Nasdaq on a whiplash whirl of unpredictability and the novelty of the Internet long gone, getting acquired or merging is becoming a more sober exit strategy for many promising companies.
“Where it used to be that everyone was doing an IPO in 18 months, I think an element of reasonableness is beginning to come into the market,” said Rick Shuttleworth, a senior partner for Silicon Valley Bank, which often plays an advisory role for young tech firms. “I’m seeing a lot of these companies that, if it were 12 months ago might have been looking at an IPO, are now realistically looking at being bought by somebody. Everyone has come to realize that as much as they hear about how hot the IPO market is, the number of firms that really are able to tap into that market is such a small number.”
And while there’s never been more capital available for entrepreneurial ventures, Shuttleworth contends, it is increasingly difficult to connect with the sort of financing that puts a company on the track for an IPO.
With Internet IPOs falling back to earth, underwriters and investors are inevitably going to get pickier about the types of companies they groom for an IPO.
Orange County’s most recent public offerings,online computer retailer buy.com and PC maker eMachines,proved less-than-spectacular, both dipping quickly below their offering price. While both of those were players in the now-unfashionable business-to-consumer segment, even companies focused on the highly touted business-to-business market are attracting more scrutiny from a more sophisticated investor base.
“I get very tired to hear someone’s going to do an IPO in 18 months,” Shuttleworth said. “It’s just getting tougher and tougher to do.”
And that adds up to mergers and acquisitions becoming a more attractive way for early stakeholders to cash in on their investments, despite the archetypal tech dream of taking a company public.
Old-fashioned consolidation, unavoidable in any maturing industry, could become another factor in escalating M & A; activity. Observers say the sheer number of dot-coms competing for attention will force some players to merge or snap up competitors, many of them private.
The most notable example of this tactic in OC was Irvine-based Autobytel.com’s $23 million acquisition of San Ramon-based AIN Corp., parent of rival web site CarSmart.com.
Sometimes, these buyouts can prove as lucrative as an IPO while offering many of the benefits, such as being able to offer employees stock options.
And some old-economy companies have been looking at acquiring Internet startups for an instant sheen of new-economy cachet.
One traditional OC firm, the former Research Engineers Inc. of Yorba Linda, did more than just add an Internet component. The company, which long specialized in structural engineering software used to design everything from bridges to office buildings, acquired three Internet-related firms in an attempt to build web sites geared toward natives of India and East Asia who live and work in the United States. This year, the company changed its name to NetGuru.com and plunged headfirst into the Internet content business, banking on the universal longing to stay in touch with home.
David Anast, publisher of the Biomedical Market Newsletter, predicted earlier this year that established healthcare firms would begin eyeing Internet startups in an effort to take advantage of the technology and web savvy they offer. And Jim Zukin, founding partner of investment banker Houlihan Lokey Howard and Zukin, recently told a crowd of Orange County investors that M & As; would outnumber IPOs this year 10-to-1.
Rick Weiner, managing partner and president of The Busch Firm, an Irvine law practice that specializes in merger and acquisition law, said acquisitions are an especially attractive exit strategy for startups that have a strong engineering staff but no management skill.
“There may be some weak links that prevent a company from doing an IPO, but could realize tremendous value with one of these portfolio companies like CMGI,” he said, referring to the Andover, Mass.-based company’s practice of snatching up promising startups and installing its own management team. “If money continues to flow into the market like it has been, you’re still going to have IPOs and you’re still going to have M & A; work. But if the market gets a little nervous like it has been, it might lean toward M & A.;”
He added that higher interest rates are likely to dampen enthusiasm for IPOs in general. Still, since most companies use stock to purchase other companies, a Wall Street downturn could slow M & A; activity too. Shuttleworth agreed. “A lot of these (purchasing firms) were high-flying Internet stocks with very lofty valuations,” he said. “We’re coming into an interesting period.” n
