In the Wall Street Journal’s special technology supplement on Sunday, October 30, the Journal’s Financial Editor Dennis Berman interviewed Michael Grimes, a managing director and head of global technology investment banking at Morgan Stanley, on the dearth of tech initial public offerings and why he thinks that’s about to change. The interview appears under the column heading “Where Are the Tech IPOs?” on page R6 of the supplement.
According to Mr. Grimes, “. . . the [tech IPO] market now is really healthy. Demand is probably as high as I’ve seen it.” “I’d say next year you’re going to be back probably to triple the current volume, about 30 to 40 [tech IPOs],” he added. The reason for his optimism appears to be simple – capital is being returned to institutional investors from all of the M&A activity this year.
When comparing the amount of money that’s come into the market for investors versus the amount of money that needs to go back into tech new issues, Mr. Grimes says that the disparity now is as wide as there has been over the last 20 years.
“There has been $125 billion returned through tech M&A, just the cash portion, into the hands of investors last year. Another $75 billion this year so far, so $200 billion or $205 billion cumulatively over that year and a half.”
“If you add up new issuance of all IPOs in tech and all secondary offerings, it’s about $25 billion to $26 billion. So an eight-to-one ratio, double or triple what it has been in a year in the last 15 years.”
But, this recycling effect of money from M&A to IPOs is now being pushed by a tidal wave of new buyers for U.S. tech assets. Mr. Grimes points specifically to:
- private-equity firms, which are outbidding strategic buyers (even tech giants and midcaps) for public tech companies,
- foreign buyers, including Chinese tech companies that now account for $40 billion in acquisitions in the $250 billion tech M&A market, and
- nontech firms including big names like Verizon Communications (acquiring Fleetmatics Group) and Wal-Mart (acquiring Jet.com), which, in order to keep up with the digital transformation of business towards data and analytics, are paying up for tech assets.
Finally, on the sale side, a pipeline of quality tech companies has been developing since April – May 2016, and this “[s]upply will catch up,” said Mr. Grimes. These companies have stayed private, fueled by raising money privately in the 2013 to 2015 time frame.
With these forces at work, together with the SEC’s Regulation S-K disclosure initiatives underway and reduced reporting requirements and exemptions for emerging growth companies, the IPO ecosystem appears to be alive and well.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...