Crisis Crushing M&A, IPO Activity

Mergers and acquisitions activity and US initial public offerings of venture-backed companies are on pace this year to hit their lowest point this decade , according to new data from Dow Jones VentureSource. During the third quarter, venture-backed companies produced just $4.57 billion through IPOs and M&A, down 66% from the $13.4 billion generated in the year-ago period.

The IPO market continues to be shut off for venture-backed companies, as only Rackspace Hosting Inc. (NYSE: RAX) went public in the third quarter, compared with 11 such offerings a year ago. Meanwhile, 66 M&A deals involving venture-backed companies generated $4.4 billion, compared with 116 deals and $12.7 billion a year earlier.

Only seven venture-backed companies have gone public so far this year, compared with 48 in the first three quarters of 2007.

The lack of IPOs is more pronounced now than during the dot-com bust earlier this decade, when 13 venture-backed companies went public in the first three quarters of 2001 and 14 venture-backed firms went public in the first three quarters of 2002.

What’s more, just 247 venture-backed companies were bought by acquirers during the first three quarters of this year, generating $22.3 billion, down from 327 and $34.1 billion in the same period last year, according to Dow Jones VentureSource.

That means 2008 is on pace to see the lowest amount of M&A deals this decade.

The number of information technology exits, which includes software, communications and semiconductors, took a dive in the third quarter to 48 deals from 74 deals in the year-ago period. More telling, the total exit dollars in IT was $2.9 billion, down 60.3% from $7.3 billion in the third quarter last year, suggesting acquirers are cutting back on spending. Year-to-date, 170 IT companies were acquired for $12.8 billion, versus 207 companies and $17.9 billion a year ago.

Health care fared poorly as well. Eleven companies were acquired for a total value of $798 million, compared with $2.5 billion from 15 deals in the third quarter of 2007. Year-to-date, 38 companies were acquired for $2.9 billion, compared with 43 companies for $6.5 billion.

The business and financial services category, which had been gaining steam the past couple of years, showed little signs of life in the third quarter. Just three companies produced $160.8 million, compared with 22 companies and $2.4 billion a year ago. Deals for the year-to-date period fell to 28 from 49, while the total value actually rose to $5.6 billion from $5.2 billion due to a strong showing in the first quarter this year.

The Wall Street Journal reports that a total of 119 companies worldwide braved the rocky stock markets during the latest three-month period, raising $7.8 billion in all, according to Dealogic. The number of deals is less than half the 241 offerings that raised $33.3 billion in the second quarter and one-third the 364 IPOs that raised $49.3 billion in the third quarter of 2007, and the decline in the amount of cash raised is even more dramatic.

It is the fewest deals in a quarter since Dealogic began tracking IPOs in 1995, and the least money raised through IPOs since the second quarter of 2003.