Big Drop in 1Q M&A Deals for VC-Backed Companies, IPO Drought Continues

4/1/09

We know there’s been a serious decline in exits for venture capitalists and their portfolio companies for the past year or more. Now two separate studies—one from Dow Jones VentureSource and the other done by the National Venture Capital Association (NVCA) and Thomson Reuters—show just how abysmal M&A and IPO activities were in the first three months of 2009.

The two studies differ in methodology, making the deal totals a bit different, yet the general trends are the same. Today Dow Jones reports that just 68 M&A deals involving venture-backed firms took place in the first quarter. The value of those deals totaled $3.2 billion, down almost 65 percent from $9.1 billion in 104 deals counted during the same quarter last year. What’s more, the number of mergers and buyouts so far this year fell to the lowest level since 1999, and the value of those transactions was the lowest quarterly figure since 2003, according to the VentureSource study.

On the IPO front, the liquidity drought persists. Venture-backed firms did not complete a single initial public offering in the first quarter of this year, making it eight straight months without a VC-backed company completing an IPO, the VentureSource study says. When will the IPO dry spell end?

“The most disturbing part about these new liquidity figures is that we’ve already reached the lows seen after the dot-com bust, and we may not be at the bottom yet,” Jessica Canning, global research director for VentureSource, said in a statement. “The IPO market is totally closed and there’s just no clear indication right now that it will revive any time in the next quarter or two.”

Both studies also confirm another problem facing venture-backed firms—M&A deals are generally not as lucrative now as in past years. In fact, the VentureSource study shows that the mean value of M&A deals in the first quarter of 2009 was $22.1 million, a far cry from the $60 million average transaction amount in the first quarter last year. The largest deal last quarter was medical devices powerhouse Medtronic’s $700 million buyout of CoreValve, an Irvine, CA-based developer of devices for minimally invasive aortic heart valve replacement. Medtronic (NYSE:MDT) also purchased Carlsbad, CA-based cardiovascular catheter firm Ablation Frontiers for $225 million last quarter. (The CoreValve deal was not included in the NVCA/Thomson Reuters study.)

No M&A deal generated more than a 1,000-percent return for its venture investors last quarter, compared with 5 transactions that brought such spoils during the same quarter in 2008, according to the NVCA/Thomson Reuters report. On a brighter side, the same study shows the number of M&A deals that resulted in a loss for venture investors fell from 10 in the first quarter of 2008 to just three in the first three months of this year.

The information technology sector led the way in terms of the number of M&A deals completed by industry, but the total of 43 deals in IT was the fewest quarterly number in a decade, according to the VentureSource study. The life sciences sector was a distant second with 11 deals completed last quarter, according to the NVCA/Thomson Reuters survey.

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