As IPO Market Shows Signs of Life, Could M&A Be Far Behind? Well, Yes

Four venture-backed companies have made it out so far this quarter, but if you’re wondering whether an M&A pick-up could be far behind, the answer may depress you.

“Four [venture-backed] deals [in Q2] don’t constitute a thawing of the IPO market,” says Paul Deninger, vice chairman of the investment bank Jefferies & Co, who believes we won’t be in truly healthy territory until 60 to 70 companies are making it out again each year. Even when signs of that happening are nearer, expect the M&A market to lag behind. “When we have a relatively consistent, stable, uplifted Nasdaq for two quarters, that’s when the M&A market will pop. That’s when corporate buyers will realize that the knife isn’t falling anymore.”

By then, they may be too late, he says. “I personally think it’s a mistake and that [acquirers] are going to regret holding out for better prices,” says Deninger. “The problem is the number of buyers has shrunk so much since 2001 that they think: if I don’t buy you, how else will you get liquid? A lot of them have been lulled into thinking they have enormous control over both their own destinations and that of their targets.”

In the meantime, that deal-making has slowed markedly — 23 venture-backed deals have closed so far this quarter, compared with 84 venture-backed deals closed in the second quarter of last year — doesn’t mean there’s no activity at all.

There’s still “a ton of interest in transactions, tons of preliminary negotiations” going on, says Deninger.