Dow Jones VentureSource: M&A Activity Dropped As Median Paid Spiked; IPO Activity Rose But Exits Were Small

The momentum that venture-backed exits gained throughout 2010 did not continue into the new year. In the first quarter of 2011, 104 U.S.-based venture-backed companies achieved liquidity, netting $9.8 billion, according to industry tracker Dow Jones VentureSource. That represents a 21% decrease in exits and a 17% increase in capital raised from the first quarter of 2010 when 131 exits raised $8.4 billion.

“It’s eye-opening for venture-backed M&A activity to be closer to levels seen in the first quarter of 2009, shortly after the collapse of the global financial markets, than in 2010, a year associated with recovery,” said Jessica Canning, director of global research for Dow Jones VentureSource. “Corporations have cash on hand and are willing to invest, but the deals aren’t happening. Acquirers may feel that rising valuations have companies on the wrong side of the fine line between good deal and risky investment.”

M&A Activity Dropped As Median Paid Spiked

In the first quarter, corporate acquirers bought 91 companies for $8.9 billion, a 22% drop in M&A activity from the same period last year when 116 acquisitions netted $7.4 billion. M&A activity was slightly higher than the first quarter of 2009 when 83 acquisitions raised $3.3 billion.

Buyouts of venture-backed companies by private equity firms were also down from the same period last year. Private equity firms spent $128 million to buy two venture-backed companies in the most recent quarter, down significantly from the same period last year when private equity firms bought seven companies for $260 million.

The $55 million median amount paid for a venture-backed company in the most recent quarter was more than double the $21 million median in the same period last year. To achieve an M&A or buyout, venture-backed companies raised a median of $13 million in venture financing, 38% less than the same period last year, and took a median of 4.6 years to build their company, less time than the 5.1-year median in the first quarter of last year.

The largest M&A deal in the first quarter belonged to Mountain View, Calif.-based Ardian, a developer of medical devices to treat hypertension, which was acquired by Medtronic for $800 million.

IPO Activity Rose But Exits Were Small

Eleven venture-backed companies went public in the first quarter, raising $768 million, an increase in activity from the eight IPOs that raised $711 million during the same period last year. Healthcare companies have been driving IPO activity the last six months accounting for 45% of IPOs in the most recent quarter and 57% of IPOs in the fourth quarter of 2010.

“U.S. venture-backed companies are still struggling to go public and many of those that do hold IPOs are pricing lower than expected,” said Scott Austin, editor of Dow Jones VentureWire. “But there are signs the second quarter could pick up — the IPO pipeline remains strong and some companies may be waiting for their 2010 financial results to be audited before they try to price.”

Currently, 45 U.S. venture-backed companies are in IPO registration.

The largest IPO for a U.S.-based company was the $107 million offering by Englewood, Colo.-based Gevo, a provider of biobased alternatives to petroleum-based products.

The median amount of venture capital raised prior to an IPO dropped 44% to $87 million in the first quarter of 2011. The median amount of time it took a company to reach liquidity fell to 6.2 years from 9.2 years in same period last year.

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