Monday, March 31, 2008

As IPO drought goes on, tech M&A rise predicted

By Christopher Calnan

Despite a drought of initial public offerings during the first quarter -- or perhaps because of it -- the volume of local merger and acquisition activity among technology companies nearly matched last year's, while the total value of those deals tripled, fueled largely by the $1.4 billion sale of EqualLogic Inc. to Dell Inc.

If the IPO drought continues, analysts project M&A activity to rise even more. But with IPOs out as a bargaining chip, acquisition prices may not be as high as selling companies hope.

The situation is expected to continue unless IPOs are completed during two time periods remaining this year that are traditionally ideal for completing such deals, the next couple of months (before the summer travel season) and September-October, before the holiday season.

In the interim, M&A activity will be bolstered as the only other option for investors seeking returns on their capital.

"Backers will want liquidity in some fashion," said Douglas Brockway, managing director of Innovation Advisors, a Waltham-based investment bank. "If the IPO window is shut, it will push people down the M&A path."

Logical acquisitions

Locally, two "Logics" have stood out from the quarter's overall M&A activity. The completed acquisition of EqualLogic and the announced acquisition of BladeLogic Inc. look to be the two major M&A deals in New England so far in 2008.

In late January, Nashua, N.H.-based EqualLogic was bought by Dell for $1.4 billion, accounting for three-quarters of the total $1.8 billion value of local M&A deals during the quarter. And last week, Lexington-based BladeLogic, which completed an IPO in 2007, agreed to be acquired for $800 million by Houston-based BMC Software Inc. The deal is scheduled to be completed within 90 days.

The $1.8 billion value of all New England M&A deals thus far in 2008 is nearly triple the $655.7 million value of deals during the same period last year. Ten local M&A deals have closed so far this quarter compared with 11 during first quarter 2007, according to Dow Jones VentureSource.

Notable deals include the $160 million sale of Cambridge-based Maven Networks Inc. to Yahoo Inc. and the $157 million acquisition of Lexington-based e-Dialog Inc. by GSI Commerce Inc.

Industry analysts said the M&A activity is expected to stay strong through the remainder of the year. To date, no local venture-backed companies have completed an IPO this year, although four are in registration.

The pace of M&A deals is expected to quicken next year if companies don't start pulling the IPO trigger this fall. By then, it would be an almost 18-month backup, said Peter Falvey, managing director of Revolution Partners, a Boston investment bank.

"That's a pretty tough pill to swallow," Falvey said. "So that means selling (rather than going public) is a lot more attractive."