A Blog by Jonathan Low


Mar 30, 2017

As the World Turns: Silicon Valley Startups Now Favor IPOs as Acquisitions Lose Favor

Remember when no one in Silicon Valley wanted to go public? The process was too degrading, the regulatory requirements too burdensome, the monetization too uncertain.

But, hey, that was so 2016...JL

Alex Barinka and colleagues report in Bloomberg:

Until recently, startups could count on generous private funding, with generous valuations, and avoid the perceived hassle of being accountable to public investors. (Now) their faith is in the public markets, where they are betting valuations will be more generous than what an acquirer would be willing to pay. That means an IPO. “A year ago, ‘IPO’ was almost a dirty acronym. Increasingly, it’s again viewed as a brass ring.”
When it comes to choosing an exit, some closely held technology companies are betting they can get richer valuations from a public listing than from being acquired.
Okta Inc. is one of at least five sale targets worth $1 billion or more -- public or private -- to have held deal talks in recent months that have fallen apart, people with knowledge of the matter said. The enterprise-software company based in San Francisco is now marketing its initial public offering to investors.
Separately AppNexus Inc., the New York-based advertising technology company, pursued what’s known as a dual-track process, according to people familiar with the matter, in which a company pursues both a sale and an IPO to determine the best exit.
After it couldn’t agree with potential buyers on a price, according to two other people, it decided to pursue the latter. It’s now on file confidentially for an initial offering, said one of the people, who asked not to be identified because the information is private.
Until recently, startups could count on generous private funding, with the associated generous implied valuations, and avoid the perceived hassle of being accountable to public investors. If a company had both exit options on the table -- an IPO or an outright sale -- the sale option looked attractive.
The pendulum is starting to swing the other way, according to Lise Buyer, founder of IPO advisory firm Class V Group.

Snap, MuleSoft

The shift is at least partly due to the success of some recent listings, Buyer said. That includes Snap Inc.’s IPO, which was 10 times oversubscribed, people familiar with the matter have said, and has soared as much as 59 percent above its IPO price. Cloud-software maker MuleSoft Inc. jumped 46 percent in its debut this month.
“People get excited about the last transaction,” she said. “It’s a bit of, ‘What has the market done for me lately?’”
Since September, 17 U.S. technology and communications companies have raised $6.3 billion through IPOs, according to data compiled by Bloomberg, compared with 13 companies that raised $4.6 billion in the year-earlier period. The four new 2017 stocks have gained an average of 31 percent, outpacing the 4.6 percent climb in the S&P 500 Index, the data show.
Okta, which was valued at $1.2 billion in its most recent private financing round in 2015, filed for an IPO after about a year-long effort to sell itself. No suitors were willing to pay more than $1 billion to acquire the eight-year-old software maker, people familiar with the matter said.

Big Check

The company would still seriously consider a takeover offer, but the check would have to be more than $2 billion now that the IPO is in progress, one of the people said. Okta set terms Monday for its IPO, and will seek to raise as much as $165 million. At the upper end of the proposed range, Okta would have a market value of about $1.4 billion after the offering, scheduled to price April 6.
While some of Okta’s investors were willing to humor the underwhelming takeover offers, backer Andreessen Horowitz thought they weren’t good enough, one of the people said. Ben Horowitz, a co-founder of the venture capital firm, is on Okta’s board. Bloomberg LP is an investor in Andreessen Horowitz.
IPOs from companies including Snap, Nutanix Inc. and MuleSoft -- with decent public market values and strong investor demand -- have underscored how attractive it is to stay independent and grow into a bigger valuation rather than sell. Twelve of the 17 IPOs since September are trading above their IPO price.

Price Ambitions

For at least five potential M&A transactions to fall apart this early in the year after meaningful back-and-forth between the targets and acquirers is rare, one of the people said. For both closely held and public companies, the story’s the same: suitors are making takeover offers, but the targets don’t think the checks are big enough.
At the moment, their faith is in the public markets, where they are betting valuations will be more generous over time than what an acquirer would be willing to pay. For private targets, that means an IPO. For public targets, it’s in their best interests to stay independent.
Okta’s price ambitions, in particular, could be hard for a suitor to justify. Despite revenue that doubled in its most recent fiscal year, losses continue to widen and the company is spending much more than it’s taking in from operations or financing rounds. Negative free cash flow increased to $48.2 million in the year ended Jan. 31, 2016, from $35.7 million the year before.
“An M&A buyer would have to buy the whole company and fund the losses,” said Rett Wallace, chief executive officer at Triton Research Inc., which analyzes Silicon Valley companies preparing to go public. “An IPO would be preferable to having the screws put to you by a buyer.”

IPO Pipeline

Plex Systems Inc., an enterprise-software maker based in Troy, Michigan, has been exploring a sale for a couple months and now is also looking at going public, people familiar with the matter said.
There are more companies in the pipeline. Cloudera Inc., MapR Technologies Inc. and ForeScout Technologies Inc. have hired underwriters for IPOs, people familiar with those deals said, while Appian Corp. and Ancestry.com Inc. are considering listings.
Cloudera, on deck with a target market value of about $4 billion, passed on a takeover offer from Intel Corp. when it raised private funding in 2014. When negotiating that deal, Intel CEO Brian Krzanich offered to acquire Cloudera outright, but the startup persuaded the chip giant to just invest $740 million of the $900 million collected in the round instead, according to a person familiar with the situation.
Representatives for Okta, Plex Systems, AppNexus, Intel and Cloudera declined to comment.
That’s not to say there haven’t been any dual-track processes that have resulted in an acquisition. AppDynamics Inc., on track to be the first technology IPO of 2017, was acquired by Cisco Systems Inc. for $3.7 billion just before it priced its shares.
Optiv Security LLC agreed to be acquired by KKR & Co. in December after filing to go public, while Symantec Corp. bought Blue Coat Systems Inc. last June, less than two weeks after the company filed its initial prospectus.
Also, Snap and MuleSoft have pared their gains since they went public after blistering debuts.
Still, the market is open for public listings. While that could change, U.S. equities haven’t shown much of the volatility that plagued the IPO market last year. Things that could affect the window include the new U.S. presidential administration, which is still working out its policies, and the Federal Reserve’s plans to inch up the federal funds rate.
“People are not certain about how long this will last, to the extent there is a window now for the capital markets,” said Tom Holden, a partner in Ropes & Gray’s capital markets group.
But for now, the doors are wide open after a tumultuous 18 months, and private companies are keen to make the most of it.
“A year ago, ‘IPO’ was almost a dirty acronym,” Buyer said. “Increasingly, it’s again viewed as a brass ring.”


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