These Days, Tech Firms Would Rather Merge Than Go Public

Forget IPOs. Technology entrepreneurs who once looked to the public markets to cash in are hoping to sell out.

Consider James Currier. The 36-year-old founder of San Francisco-based Tickle Inc. this year decided against taking the online matchmaker public in favor of selling to Monster Worldwide for close to $100 million.

A rite of passage for hot tech companies in the 1990s, initial public offerings are now considered “just a lot of work,” said Currier, citing sluggish markets and tighter regulations for a boom in Silicon Valley mergers and acquisitions.

In the first half of this year, 119 U.S. tech companies worth $7.2 billion were sold or merged, according to research firm VentureOne. At the same time, six venture-backed tech companies raised $505 million through public offerings -- down sharply from the 176 that raised $13.8 billion going public during the first six months of 1999.

“Right now, we’re in the most robust mergers and acquisitions markets we’ve seen for a number of years,” said Jason Ghassemi, analyst with FactSet Mergerstat, a Santa Monica research firm. “The sheer number of tech deals is fueling the M&A; revival.”

Before the tech boom, selling a start-up to a larger, better-financed company was by far the preferred method for cashing out. But as investors lavished money and attention on companies with names that sounded even vaguely tech-related, the IPO became a sort of financial holy grail.

Even at the height of the frenzy in 1999, mergers and acquisitions made up 55% of all tech deals, according to a survey by VentureOne of venture-capital-backed tech companies. The rest were IPOs. Under normal circumstances, IPOs make up less than one-fifth of all transactions.

In 2001, though, the number of IPOs dropped dramatically as the tech bubble burst. And in 2002, IPOs accounted for a mere 2% of all tech deals. Companies that didn’t run out of cash were swept by a wave of mergers and acquisitions, said Jonathan Silver, founder of Core Capital Partners in Washington.

A second wave of acquisitions began in 2003 as small, healthy companies that survived the downturn sought to consolidate and grow. This time around, stock prices generally are lower and companies healthier than during the boom.

“Five years ago, there were companies of little quality garnering high valuations,” said Henri Isenberg, vice president of business development for Symantec Corp. “Now, you’re seeing companies on the market with mature technologies, good revenues and profits.”

Among the deals this year: Symantec, of Cupertino, Calif., bought Bright mail Inc. in a deal worth $370 million; CNet Networks Inc. of Redwood City, Calif., snapped up Webshots Inc. of Redwood City for $70 million; and IBM Corp. this month purchased Alphablox Corp. of Mountain View, Calif., for an undisclosed sum.

Brightmail, a San Francisco company that makes anti-spam software, had been on the IPO path -- it selected an investment banker in February and filed its intent to go public with the Securities and Exchange Commission in March.

But in May, Symantec, which owned 11% of Brightmail, offered to buy the rest of it in a deal worth 14 times Brightmail’s 2003 sales of $26 million.

It was a generous offer, comparable to what the company probably would have gotten by going public, said Brightmail Chief Executive Enrique Salem. Meanwhile, the prospect of being a public company began to weigh on Salem.

Chief among his concerns was Sarbanes-Oxley, the 2002 law meant to curb corporate abuses by requiring greater disclosures and encouraging the appointment of more independent board directors.

Complying with those regulations would cost several million dollars a year. For a small company like Brightmail, the expense would have been significant, said Stephen O’Leary, managing director of Broadview International, a New York-based corporate finance firm.

In addition, Brightmail, which had 35 salespeople, wanted to expand into Asia and Europe. The deal would give it instant access to Symantec’s 600-person international sales force. The deal closed in June.

“The glamour and mystique of going public is highly overrated,” said Salem, who worked at Ask Jeeves Inc. when the Emeryville, Calif., company went public in 1999.

Companies are shying away from the IPO for another reason: Few that have gone public this year have fared well, O’Leary said. More than 60% of companies that went public this year ended June with share prices below their IPO price.

Staktek Holdings Inc., a memory chip company in Austin, Texas, debuted in February at $14.50 on Nasdaq but fell to $5.25 by the end of June. AlphaSmart Inc. of Los Gatos, Calif., opened at $6.15 in February and closed at $5.63 on June 30.

“Being public is not necessarily attractive right now,” O’Leary said.

At the same time, eager buyers abound. After three years of belt-tightening, large companies are again thinking about building sales, either by filling gaps in their product lineups or by amassing market share.

IBM has been beefing up its ability to analyze vast amounts of business data, a specialty of Alphablox. Symantec had been seeking entree into the fast-growing anti-spam market, where Brightmail had a solid reputation. And Monster, which runs a resume-posting site, had been looking for ways to pull more revenue from the casual Web surfers who formed the core of Tickle’s business.

“All of our revenue had come from employers,” said Monster Chief Executive and Chairman Andrew McKelvey. “What we and every other Web company were looking for was revenue from the consumer. That’s what James had.”

Currier also got what he wanted. Having founded the company in 1999 and nurtured it through the boom-and-bust years, Currier wanted Tickle to tap into corporate customers.

Hooking up with Monster gave him instant access to its roster of corporate clients, he said.

“Everything we have, they wanted,” said Currier, who is now Monster’s senior vice president of consumer services. “And things we wanted to build, they had.”