[qi:115] OpenTable’s stunning performance in its first day of trading is a sign of unexpected warmth in the market for technology IPOs. But while the market success of the restaurant reservations software developer may not be a true bellwether that leads to a flurry of additional IPOs, the new listing’s surprising gains could signal a shift in the balance between venture capitalists’ two traditional exit opportunities: merger-and-acquisition deals and public offerings. With tech IPOs absent during the nine months between Rackspace’s August 2008 offering and SolarWinds’ offering earlier this week, that “balance” has been more or less nonexistent, but a perceived revival of IPOs could prompt more activity on the M&A side as well.
Buyers with cash to spend on tech startups have enjoyed a period of depressed valuations since last fall, but M&A deals have been few and far between as stock prices have fluctuated and uncertainty has prevailed. More recently, though, increased stability in the public markets has led to reports of rebounding M&A activity. A closed IPO window typically coincides with a buyer’s market for tech companies on the M&A side, while superior IPO opportunities tend to drive prices upward as stakeholders believe they have alternatives beyond a sale. Could OpenTable’s striking success — at least thus far — portend a run on venture-backed startups before their prices rise again?
According to one boutique investment banker I spoke with, there’s currently a perception among some buyers that it’s time to move quickly while target companies are still cheap. “People with cash who’ve been hiding out on the sidelines are coming back aggressively,” he said. A McKinsey study released last month showed that high-tech companies that became stronger during the post-dot-com bust of 2000-2002 frequently did so by making acquisitions, and did so most effectively when they waited for more attractive valuations later in the downturn before buying. Though some still believe valuations will continue to drop, companies such as Yahooare showing interest in acquisitions, and Internet stocks are beginning to rally again. And although no tech companies are on deck for upcoming IPOs in OpenTable’s wake, the perception that a candidate could go public sooner that expected could raise its price on the M&A market.
To be sure, OpenTable wasn’t a typical IPO candidate. Founded in 1998, the dot-com survivor is way past the 4-to-7-year-old window in which most VCs seek to gain liquidity, and has even outlasted the 10-year lifespan of most VC funds. It’s also looking to raise proceeds to compensate insiders, rather than fill its coffers for growth as many tech startups do. But the mere existence of any IPO window at all, let alone one in which a company that initially intended to price its shares as low as $12 saw them change hands for as much as $35.50 on the first day of trading, surely represents a psychological change from a few months ago, and may signal a fresh chance for VCs to gain liquidity through a sale as well.
Shares of OpenTable, which were initially set at a range of $12-$14 and were subsequently repriced to the $16-$18 range, finally priced at $20. They ended their first day of trading at $31.89, up just shy of 60 percent.