M&A Liquidity Up, IPO Market Still Anemic: Fourth-Quarter Data on Venture Exits Is a Mixed Bag

It’s too early to say whether it’s the beginning of the end of the liquidity drought, or just the end of the beginning. But after seven straight quarters of declining IPO and M&A earnings for venture-backed U.S. companies, there was a ray of hope in the fourth quarter of 2009. Venture-backed firms raised $7.5 billion through mergers and acquisitions and IPOs in Q409, the highest total since the first quarter of 2008, according to year-end data released today by Dow Jones VentureSource.

It was the first quarterly increase in liquidity since 2007, and exceeded Q408 levels by almost 50 percent. The jump was fueled largely by a dramatic increase in the median amount paid in company acquisitions, from about $30 million per deal in the third quarter of 2009 to nearly $85 million per deal in the fourth quarter.

“The fourth quarter has set the stage for an active year in M&As in 2010,” said Jessica Canning, Dow Jones VentureSource’s global research director, in a statement. “As the economy improves, acquirers are gaining confidence in their own financial situation and returning to strategic acquisitions. At the same time, the steady trickle of public offerings is teasing investors who expect the IPO window will re-open in the coming year.”

Of course, it’s also easy to take a glass-half-empty view of the latest round of data. The median M&A amounts in the fourth quarter were inflated by a small handful of relatively large deals, including Amazon’s $847 million acquisition of Zappos, ViaSat’s $568 million acquisition of WildBlue Communications, and Logitech’s $405 million purchase of LifeSize Communications. The total liquidity among venture-backed companies in 2009 was only $17.1 billion, a poor showing next to 2007’s total of $61 billion and 2008’s $26.1 billion. And the median amounts paid in M&As, averaged across all of 2009, was just $27 million, which looks slight compared to 2007’s $73 million and 2008’s $33 million.

About the best thing you can say about M&A trends is that acquirers were finding a lot of bargains in 2009. Canning called 2009’s $27 million median “a positive sign for acquirers looking to purchase companies at reasonable prices.”

The IPO market, after a pathetic 2008, improved by only a small margin in 2009. Seven venture-backed companies went public in 2008, raising a total of $550 million. In 2009, IPOs among venture-backed companies increased to eight, with the total amount raised increasing to $903 million. (Three fourth-quarter IPOs—by Chicago-based Echo Global Logistics, Sunnyvale, CA-based Fortinet, and Seattle-based Omeros—accounted for $220 million of that total, making it the slowest quarter since Q109, when there were no IPOs at all.)

But while the IPO numbers did increase in 2009—and while companies in Xconomy’s home cities, including Watertown, MA-based A123Systems ($371 million), San Diego-based Bridgepoint Education ($142 million), Woburn, MA-based Logmein ($107 million), and Seattle’s Omeros ($68 million) contributed significantly to the 2009 totals—the IPO market was still largely shuttered compared to 2007, when 78 companies went public, raising $6.9 billion.

Could 2010 turn out better? It almost has to, unless a big chunk of the 25 venture-backed companies currently in registration with the SEC drop their IPO plans. One interesting tidbit in the Dow Jones VentureSource data is that venture-backed companies seem to be moving to pay off their backers with greater haste. The companies that achieved exits through mergers or acquisitions in 2009 had been in business for a median of 5 years and had raised a median of $18 million, compared to six years and $22 million for companies acquired in 2008. Companies that went public in 2009 were 7.9 years old on average and had raised $43 million, compared to 8.7 years and $55 million for companies that went public in 2008.

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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