Wall Street Beat: Tech IPOs, M&A continues to heat up

A strong stock market fuels activity

Several recent IPOs and eBay's US$800 million cash offer for payments startup BrainTree this week highlight what looks like a burgeoning market for tech initial public offerings and mergers and acquisitions.

On Friday, for example, Violin Memory, a flash storage maker, and RingCentral, a provider of cloud-business communications products, both went public. Last week, Benefitfocus, a provider of cloud-based benefits software solutions, and FireEye, which offers a virtual machine-based security platform, went public.

Meanwhile, Twitter announced that it plans to go public, and Chinese e-commerce giant Alibaba Group will also pursue an IPO in the U.S.

On the M&A front, following Microsoft's $7.2 billion offer for Nokia earlier this month, eBay announced it would pay $800 billion for BrainTree to enhance parent company PayPal's mobile capabilities.

Underlying both IPO and M&A activity is a strong stock market and a tech sector that has been getting stronger. Though Friday was a down day for markets as the political battle over funding heath care reform comes to a boil in Washington, D.C., overall it has been a strong year for the stock market.

The Dow Jones Industrial Average is up about 17 percent for the year, the Standard and Poor's 500 index is up about 19 percent for the year, and the Nasdaq stock market is up about 25 percent for the year.

The market for tech stocks in particular has been gaining steam, catching up to other sectors. At the end of the first quarter, the Nasdaq Computer Index was up about 6 percent for the year. Now, it's up about 16 percent for the year, and the Nasdaq Telecommunications Index is up about 21 percent for the year.

Industry insiders expect the tech IPO market to stay strong. A recent poll by KPMG found that of those tech-sector venture capitalists surveyed, more than half expected more tech IPO activity in the rest of the year. Twenty-two percent of those expected tech IPO activity to increase more than 10 percent.

"I think it's due to the market having done really well in the last four months," said Mihir Jobalia, global head of tech for KPMG Corporate Finance.

In the first eight months of the year the median return on tech IPOs was 26 percent, based on share price increases from IPO prices, Jobalia noted.

Tech companies these days are better prepared to go public than in the dot-com boom era of the late 90s, Jobalia said.

"There is a higher bar for companies to go public," Jobalia said. "The higher quality comes from having a more robust business model, better margins, and strong management teams focusing on financial management."

More broadly, on the M&A front, more than 42 respondents to the overall KPMG poll, which also included venture capitalists outside of the tech arena, anticipated that their organization would be involved in a merger or acquisition in the last half of the year.

As the stock market continues to bounce back from the recession, public ventures, for example, are more willing to pay higher multiples for acquisition targets, can use stock as currency and are also able to raise more cash, Jobalia said.

Of course, not all IPOs and M&A deals are successful. Some analysts have said that Microsoft's deal for Nokia is essentially doubling down on a losing bet against Apple's iPhone and devices based on Google Android OS. And, while Ring Central closed Friday at $18.20, after being priced at $13.00, Violin Memory closed at $7.02 after being priced at $9.00.

Based on current trends however, one or two IPOs that fail to meet expectations are not likely to slow down the market.

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Tags Mergers and acquisitionsbusiness issuestwitterebayfinancial resultsFireEyeAlibaba GroupBrainTreeRingCentralViolin MemoryBenefitfocus

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Marc Ferranti

IDG News Service
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