Only 8 venture-backed companies raised $934.2 million through IPOs in 3Q06

Only eight venture-backed companies raised $934.2 million through Initial Public Offerings (IPOs) in the third quarter of 2006 reflecting the slowest quarter since 2003, according to the Exit Poll report by Thomson Financial and the National Venture Capital Association (NVCA). This figure represents a significant decrease from the second quarter of 2006 when 19 venture-backed companies went public and raised more than $2 billion. The results continue to disappoint when comparing the statistics to the same period last year, when 19 venture-backed companies went public and raised nearly $1.5 billion. 

Venture-backed acquisitions reported in the quarter also fell in volume with 74 companies acquired for a disclosed value of $2.7 billion. Acquisitions which returned more than 10x the amount of the original venture investment comprised 21% of the disclosed transactions while 38% of the disclosed acquisition deals returned less than the total venture investment.

In another data release, according to the Quarterly Liquidity Report from Dow Jones VentureOne, a total of $623.3 million was  raised by the 8 IPOs in the third quarter, down significantly from the Q2 2006 figure ($1.25 billion) and the Q3 2005 amount ($956 million).

A total of $6.78 billion was paid in M&As for 97 venture-backed companies in the third quarter of 2006, down from $7.71 billion in Q2 2006 and $8.38bn Q3 2005.

So far this year, $23.03 billion has been paid in 311 M&As, putting the activity on track to match last year's M&A levels. In addition, $2.47 billion has been raised in 37 IPOs through the third quarter, almost assuring that the IPO activity will surpass last year's 42 IPOs and $2.56 billion, according to VentureOne. 

Venture-Backed Liquidity Events by Year/Quarter, 2001-2006

Quarter/Year

Total M&A Deals

M&A Deals with Disclosed Values

*Total Disclosed M&A Value ($M)

*Average M&A Deal Size ($M)

**Number of IPOs

Total Offer Amount ($M)

Average IPO Offer Amount ($M)

2001

353

165

16798.9

101.8

41

3,489.9

85.1

2002

318

152

7916.4

52.1

24

2,473.5

103.1

2003

293

123

7726.1

62.8

29

2,022.7

69.7

2004-1

80

45

3921.0

87.1

13

2,721.1

209.3

2004-2

89

48

4514.6

94.1

29

2,077.8

71.6

2004-3

87

47

4142.8

88.1

24

3,225.6

134.4

2004-4

84

46

2862.2

62.2

27

2,990.4

110.8

2004

340

186

15440.6

83.0

93

11,014.9

118.4

2005-1

82

46

4364.9

94.9

10

720.7

72.1

2005-2

80

36

4791.0

133.1

10

714.1

71.5

2005-3

98

47

4374.8

93.1

19

1,458.1

76.7

2005-4

86

39

2563.7

65.7

17

1,568.1

92.2

2005

346

168

16094.4

95.8

56

4,461.0

79.7

2006-1

104

48

5384.4

112.2

10

540.8

54.1

2006-2

91

37

3747.6

101.3

19

2,011.0

105.8

2006-3

74

34

2758.6

81.1

8

934.2

116.8

2006

269

119

11890.6

99.9

37

3486

92.2

Source: Thomson Financial & National Venture Capital Association
*Only accounts for deals with disclosed values. **Includes all companies with at least one U.S. VC investor that trade on U.S. exchanges, regardless of domicile.

IPO Activity Highlights

The largest IPO of the third quarter was the $270 million offering from Mindray Medical International Limited. Based in Shenzen China, the medical equipment manufacturer priced 20 million ADR’s (American Depository Receipts) at $13.5 a share. Backed by Goldman Sachs, Mindray also posted the largest first day gains of any venture-backed company that went public during the quarter, jumping 30% to close at $17.55 a share.

All industry categories experienced steep declines in volume. The perennial sector leader, Technology raised $480 million in public offerings, followed closely by the Life Sciences industry which captured $359 million. The Non-High-Technology sector priced one IPO that accounted for $95 million. 

While the overall volume levels were dismal, the performance of the third quarter offerings were encouraging. As of September 29, 2006, seven of the eight venture-backed companies that priced in the quarter were trading over their initial offering price. For the rolling 12month period, 58% of the venturebacked companies that went public are currently trading above their offering price. The statistics also revealed that the average offering size as well as the average post-offering values were at their highest levels since the third quarter of 2004.

In addition to the IPOs completed this quarter, there are currently 51 venture-backed companies “in registration” with the United States Securities and Exchange Commission. This compares favorably to the 41 companies in registration at the end of the second quarter of 2006.

Merger and Acquisition Highlights

The third quarter continued the trend of the previous quarter in which acquisition volume declined. The average disclosed deal size was $99.9 million, a slight decrease from second quarter’s average, but in line with the average deal size for third quarter 2005. Median deal size remained strong in the third quarter, with a median disclosed value of $60.0 million. This compares to a median disclosed deal size of $56.0 million in the first quarter, and $48.1 million in the second quarter 2006.

The Technology sector continued to dominate the venture-backed M&A landscape with 52 deals and a disclosed value of $1.6 billion. Within Technology, the Computer Software sector had 17 transactions, followed by the Internet Specific sector with 13 deals. Fifteen Life Sciences companies were acquired in the third quarter with a disclosed deal value of $802.7 million.

The largest disclosed deal of the quarter was the deal was the $365 million acquisition of Corus Pharma, Inc., a company that develops therapeutics to treat severe respiratory diseases, by Gilead Sciences, Inc. The second largest deal was R2 Technology, which develops analytical software aids for mammographic screening, being acquired by Hologic, Inc. for 237.1 million.

Acquisitions which returned more than 10x the amount of the original venture investment comprised 21% of the disclosed transactions for the quarter. At the opposite end of the spectrum, 38% of the disclosed acquisition deals returned less than the total venture investment. An equal percentage of deals – 38% returned 1-4x investment for the quarter. 

Analysis of Transaction Values versus Amount Invested

Relationship between transaction value and investment

Q3 2006

Deals where transaction value is less than total venture investment

13

Deals where transaction value is 1-4x total venture investment

13

Deals where transaction value is 4x-10x total venture investment

1

Deals where transaction value is greater than 10x venture investment

7

Total Disclosed Deals

34**

Source: Thomson Financial & National Venture Capital Association
** Disclosed deals that did not have a disclosed total investment amount are not included.

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