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Venture-backed exit market shows signs of life in Q2

Venture-backed company exit activity showed mild improvement in the second quarter of 2009 but still fell far short of historical norms, according to a report by Thomson Reuters and the

Venture-backed company exit activity showed mild improvement in the second quarter of 2009 but still fell far short of historical norms, according to a report by Thomson Reuters and the National Venture Capital Association.

There were five venture-backed IPOs valued at USD720.7m in the second quarter of 2009, the most offerings since the first quarter of 2008 (also five) and the highest dollar volume since the fourth quarter of 2007 (USD3.0bn).

Four of the five IPO exits for the quarter were in the information technology sector, accounting for USD579.0m. Within this sector, computer software and services companies garnered the most deals, with two, while the largest dollar volume was associated with the communications and media related-transaction worth USD279.3m. There was one non-high technology deal by a consumer related venture-backed company for USD141.8m.

The tally of M&A exits as of the last day of the quarter was 59 totalling USD2.6bn, similar to the level of activity across the two prior quarters but considerably higher in average disclosed value.

"The fact that several venture-backed companies successfully entered the public markets and performed well is encouraging," says Mark Heesen, president of NVCA. "However, we remain concerned about the extremely thin pipeline of companies in registration as it indicates that it will be some time before we can even be in a position to return to healthy IPO activity levels."

The largest transactions of the quarter were a USD279.3m issue from Colorado-based earth imaging company DigitalGlobe in May followed by a USD151.5m offering from Texas-based network management company SolarWinds in the same month.

In addition to domestic activity, there was one offering by a US venture-backed company on a foreign exchange in the second quarter. California-based information retrieval services company Array Networks went public on the Taiwan stock exchange in May.

Of the five IPOs in the second quarter, all were trading at or above their offering prices as of 30 June. Only ten venture-backed companies are currently filed for an initial public offering with the SEC.

As of 30 June, 59 venture-backed M&A deals were reported for the first quarter, 13 of which had an aggregate deal value of USD2.6bn. The average disclosed deal value was USD197.7m, the highest level since the fourth quarter of 2007.

The IT sector led the venture-backed M&A landscape, with 46 deals and a disclosed total dollar value of USD215.6m. Within this sector, internet specific and computer software and services companies accounted for the bulk of the targets, with 17 and 13 transactions respectively across these sector subsets. Life sciences saw the next highest level of activity with seven deals and a combined disclosed value of USD1.4bn. Finally, non-high technology deals accounted for six exits with USD990.0m in disclosed values.

The largest transaction of the quarter was the acquisition of surgical instrumentation and equipment provider Corevalve by Medtronic, also a medical equipment concern, for USD700m.

Deals bringing in the top returns, those with disclosed values greater than four times the venture investment, accounted for 42 per cent of the total in the second quarter of 2009, significantly better than in the first quarter of 2009 when these deals accounted for 21 pe rcent. Those deals returning less than the amount invested also accounted for 42 per cent of the quarter’s total, compared to 57 per cent of the total in the previous quarter.

"The improved quality of acquisitions was driven by a number of favorable deals in the second quarter; we are hopeful this will continue," says Heesen. "We would like to see the volume of acquisitions rise over the next several quarters to realign with historical norms. Hopefully, the improved stability in the market in the last month should send a signal to corporate acquirers that now is the time to ramp up their acquisition activity."

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