Enterprise software companies have made a big splash on the IPO market in recent months. But by and large, acquisitions haven’t kept pace.
So far this year, acquirers have spent or signed agreements totaling less than $700 million in disclosed value for venture-backed enterprise software companies outside the security space, according to Thomson Reuters (publisher of VCJ). Over the same period, at least 12 venture-backed enterprise software companies have gone public on U.S. exchanges. They have raised more than $1.2 billion from those offerings, and have a combined market capitalization exceeding $7 billion.
It’s a curious state of affairs for a sector in which VCs have historically generated the majority of exit returns from M&A.
But given the wide-open IPO window and the availability of growth capital, it’s not surprising that more entrepreneurs prefer going public, said Byron Deeter, a partner at Bessemer Venture Partners who focuses on cloud computing.
“They can say no (to acquirers),” Deeter said. And they often do.
Bessemer portfolio company Box, for example, reportedly turned down a $600 million offer from Citrix in 2011 (in retrospect a wise decision). Cloud software provider Eloqua, another portfolio company, also had interested suitors before going public, but didn’t sell to Oracle until months after its 2012 IPO.
This year, acquirers are sniffing around, but not finalizing many large purchases. On public markets, meanwhile, cloud and SaaS companies are commanding premium valuations, with investors willing to accept bottom-line losses today in exchange for growth and the potential for future dominance. Castlight Health, for example, carried out the largest venture-backed IPO of the first quarter, and commands a valuation of $1.7 billion. This is despite the fact that the provider of cloud software for managing healthcare benefits is unprofitable and posted just $13 million in revenue last year.
A concern for many large acquirers is that SaaS and cloud software acquisitions will take a long time to be accretive to earnings, said Norm Fogelsong, general partner at Institutional Venture Partners. While there is reason to expect big revenue gains a few years down the road, many acquirers are looking for things that will be accretive in a year or two.
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