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Venture-Backed Exits Move Toward MA

NEWARK, N.J. – In a third quarter that saw venture-backed initial public offerings drop to 20 from 31 in the second quarter, venture firms increasingly turned to mergers and acquisitions as an exit strategy in 1998, according to statistics released in November by Venture Economics Information Services.

The quarter began with a hot venture-backed IPO market, as 19 companies held IPOs in the first six weeks. However, the window slammed shut in July and there was not another venture-backed offering until eBay priced on September 23. The dry spell continued into the fourth quarter, as no venture-backed companies held public offerings throughout October. Recently, Internet-related businesses have begun to awaken the IPO market, but withdrawn and postponed filings in other industries continue to accumulate.

Meanwhile, M&A activity among venture firms has increased across the board compared to one year ago. The number of deals through the third quarter grew to 119 in 1998 from 107 in 1997, and the value of the deals increased 28.4% to $7.1 billion. By comparison, venture-backed mergers totaled just more than $7.5 billion for all of 1997. Also, the ratio of venture-backed IPOs to venture-backed mergers has widened to 71-to-119 in 1998 from 102-to-107 through the third quarter of 1997.

Thus far, the computer industry and communications industries have seen the majority of merger activity. There have been 51 computer-related mergers in 1998 valued at $2.7 billion, for an average of $74.6 million per deal. The 17 communications mergers had a higher per deal valuation, at $145.6 million, amassing a total value of $2.1 billion. Valuation data was based on disclosed figures only.

As venture investors pursue liquidity events, a prolonged slowdown for venture-backed IPOs will leave them with few options outside of mergers, said Toby Walters of Venture Economics. “I don’t think there is an alternative, other than to continue financing portfolio companies,” he said.

The numbers indicate that additional financings have also begun to take hold. Firms have invested $11.7 billion into portfolio companies in 2,533 transactions through the first three quarters of 1998, a 15% increase in dollar value since 1997. Computer-related investments continue to be the most popular, as VCs poured $1.4 billion into that sector in the third quarter of 1998. Communications, non-high technology and medical-related companies saw strong venture interest as more than 100 companies in each of those sectors received venture funding in the third quarter.