IPO Slowdown: Is It Good or Bad for the Middle Market?

The first quarter of 2008 witnessed a drastic slowdown in IPO offerings. Data from Thomson Financials indicates a massive reduction of 46.1 % in US IPO proceeds. The study also points to a 15 % drop in IPO volume for January 2008. Further painting a bleak picture is IPO proceeds worth $6.3 billion fading away from the global market owing to withdrawal of 21 IPOs in January 2008. This figure is significantly three times higher than what it was for December 2007 when only 16 IPOs collectively valued at $2.1 billion were withdrawn.

The primary cause for this IPO slowdown is considered to be the consistently dropping value of the US greenback. The weakening dollar resulting from a poor economy and a credit crunch in the US is causing frequent fluctuations in the global markets. Market upheavals over the past several months have made investors apprehensive about investing in IPOs. Instead, investors are playing the wait and watch game to tide over the rough weather.

The IPO slowdown is however not necessarily bad for everyone. It has brought in its wake wonderful merger and acquisition opportunities particularly for the middle market segment. According to a recent Baird's Investment Banking Group report, mergers and acquisitions among the small and medium sized enterprises will be much more active than other segments.

Baird defines middle market transactions as those under $1 billion. This makes the deals far more attractive than the multi-billion dollar mergers and acquisitions. Buyers can now materialize their business ideas without spending a fortune. Plenty of buyers as well as sellers are available in the middle market segment. It is their attempt at expanding and strengthening existing assets. In line with the general sentiment, experts forecast enhanced M&A activity in the middle market segment through 2008.

In contrast, big ticket deals are expected to take a back seat owing to the tough
situation the credit market is presently facing. Economic instability has made it difficult to secure large amounts of financing that mega-deals warrant. Due to the IPO slowdown, the bigger players have decided to wait for the economic conditions to improve or at least stabilize before making the next move.

Studies show 2007 to be replete with vigorous merger and acquisition activities in the technology sector. Many of the deals happened between European countries and the US. Experts indicate further consolidation of these markets through 2008 with buyers resorting to creative ways of acquiring companies.

In addition to Technology, other sectors Baird identifies as favorable for merger and acquisitions include Telecom, Energy, Materials and Business Process Outsourcing (BPO). Strategic business combinations are slated to replace superficial mergers that are oftentimes destined for failure from the beginning. True evaluation based on tangible value is the driving force behind present day deals.

Today's middle market mergers may seem similar to the heightened M&A activity in the late 1990s when the IT boom was at its peak. However, it is different in the basic ways it transpires in the current environment. At that time, deals were signed on the basis of the number of visitors to a web site and other data which painted a rosy picture of an otherwise ailing venture. Because of the in-depth assessment of today's consolidations, a deal recession similar to the one that happened at the beginning of this century seems unlikely.

Private equity is also playing a key role in acquiring cross-border companies. In fact, these acquirers invested $55.5 billion within the first two quarters of 2007 in 29 deals. A continued drop in the value of the dollar and the availability of investors with loaded pockets make market analysts predict the trend to continue in 2008. Which way the tide turns remains to be seen. It depends on several important parameters including the appreciation or depreciation of the US dollar and the overall US economy.

Mark Jordan is the managing principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of Enhancing Your Business Value…The Climb to the Top, Selling Your Business The Hard Easy Way and co-author of The Business Sale…A Business Owner’s Most Perilous Expedition. He is also the author of numerous articles. For more information email him or visit www.vercoradvisor.com.