VC Firms Look To M&A For Exits

From the November 6 edition of Merger Mogul newsletter, published by the Association for Corporate Growth:

The M&A market is proving to be a handy escape hatch for venture capitalists trying to cash out of portfolio companies. Outright sales of venture-backed companies account for just a sliver of M&A deals each year and are rarely eye-catching, but M&A remains an intriguing option to liquify a VC portfolio at a time when the more publicized exit mechanism—the IPO—has gone into deep freeze for venture investors.
In fact, recent M&A trends involving VC-backed targets are nothing to shout about. Total disclosed deals, according to the National Venture Capital Association (NVCA) and Thomson Corp., continued to slide in the third quarter to 74 from 91 in the second quarter and 104 in the opening leg of 2006. But compared to IPOs, the deals outlet shines. A mere eight venture-backed firms went public in the third quarter against 19 in the second and 10 in the first. NVCA President Mark Heesen says the M&A slowdown may be a “quarterly aberration” that reflects a “slower summer business climate.” Deal flow may be up 15% to 20% in the final quarter, he suggests. Heesen makes no bones about the difficulty in floating new issues, saying IPO activity is at “alarmingly low levels” and that public markets may not be “the destination they once were for emerging growth companies.”
For the first nine months of 2006, the NVCA-Thomson Exit Poll found, 269 venture-backed targets were acquired compared with about 6,300 deals overall. Disclosed values—for 119 deals—came in just shy of $1.2 billion versus around $856 billion overall. Average deal price for a VC-backed sell-off was $99.9 million for the first nine months against $95.8 million.
Venture capitalists seem to have historically preferred IPOs because the new-issues market has bought growth stories and because public markets have allowed follow-on cash-outs—the proverbial extra bites of the apple. But M&A is no slouch in rewarding them either. Investors sold for less than their total investment in 13 of the 34 third-quarter deals with disclosed prices. But they made money in the others—including 10 times the investment in seven deals and four to 10 times in one other deal, while doing as well as four times their investment in 13 others.

By Marty Sikora