Click Heels 3 Times and Say 'I want to IPO, I want to IPO'

Alas Liquidity Events, I Knew Them Well....If only wanting a liquidity event and getting it were that easy.
Written by Brian Sommer, Contributor

Alas Liquidity Events, I Knew Them Well....

If only wanting a liquidity event and getting it were that easy. As we say back in Texas, “'wantin’ and ‘gettin’ are two different things”.

For technology executives looking for a liquidity event for their firm, the current Wall Street mess is making that liquidity event less and less likely. VentureWire Alert (see www.dowjones.com) reported today that:

“According to new data from Dow Jones VentureSource, mergers and acquisitions activity and initial public offerings of venture-backed companies are on pace this year to hit their lowest point this decade. During the third quarter, venture-backed companies produced just $4.57 billion through IPOs and M&A, down 66% from the $13.4 billion generated in the year-ago period.

The IPO market continues to be shut off for venture-backed companies, as only Rackspace Hosting Inc. went public in the third quarter, compared with 11 such offerings a year ago. Meanwhile, 66 M&A deals involving venture-backed companies generated $4.4 billion, compared with 116 deals and $12.7 billion a year earlier.”

Firms looking for an acquirer are finding times tough as are those firms looking for an IPO or more money from a VC or private equity firm. Capital is tight and it may get tighter.

Recent events do not bode well for those seeking help away from Wall Street. You’ve got to read this week’s Forbes article on Texas Pacific Group and their investments earlier this year in Washington Mutual. Likewise, read the entire issues of Conde Nast Portfolio and BusinessWeek this week. Private equity firms are getting hammered and they’ll not be in much of a mood for more investing until they can get their investments in entities like Chrysler, GMAC and others on a better footing.

In a call I did with a M&A reporter yesterday, the questions asked of me were telling: - “Will there be any big acquisitions in the near term?” - “Will acquirers be looking at firms with large cash balances?” - Etc.

My answers were cautious. I suspect that big companies with lots of cash will make some self-funded deals but smaller deals will look more attractive overall. How can anyone do a mega-deal if you can't find a Wall Street firm left to raise the capital? If you’re a small firm looking for a liquidity event, start pitching woo to a well-heeled, big tech company now. If you’re a medium-sized firm, start tarting up that balance sheet today. You’ll need to book every sale you can, recognize all the revenue you can and reduce costs to the bone if you want even a prayer of getting acquired. Big-time, positive cash flow will be king for the foreseeable future.

I spoke with an executive at a US tech firm last week and they’ve abandoned plans for an IPO for now. They’re moving their EVP Sales into the CEO slot and they are going to focus on sales growth for the foreseeable future. They’ve already decided that a liquidity event isn’t going to happen and they’re not going to let IPO planning become a distraction for the management team. I suspect other firms will need to follow suit on this strategy.

5 Month Business Forecast: Crankier VCs ahead with heavier than usual frustrations emerging in board meetings. Expect no new capital or liquidity events any time soon. Cloudy financial markets ahead that could change overnight. Cold shoulders coming from commercial bankers. Little sunshine for private equity firms and Wall Street. Wear your overcoat and galoshes – it’s messy out there.

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