The stalled IPO market is playing into the hands of large companies, or so-called "strategic buyers" of companies, planning to or having already filed for an IPO.
Recently, two of the deals we were following, BlueArc and Force10 Networks, were acquired. The transactions illustrate another challenge in creating a robust IPO market for private companies that might have made it out earlier but are now fairly mature. There's a paradox in demanding more maturity from companies doing an IPO. Greater maturity tends to mean less upside for investors.
In the case of Force10 Networks, the company emerged as a leading provider of networking infrastructure to connect datacenters to users on the internet. The company has been successful and reached a $200m revenue run rate. But YoY growth was just 4.5% for the first six months of 2011 and the company was still losing at a $40m/year rate. Dell (DELL) bought the company for what has been reported to be around $600m, or about 3x the revenue run rate. Given the financials and the current investment climate, it's hard to argue that the company would trade higher as a public company.
BlueArc is a smaller company in the networked storage space ($100m revenue run rate) that has also been losing money. The numbers have been improving and our estimates would have had them becoming profitable within our IV analysis period. Hitachi (HIT) ended up buying BlueArc for a reported $600m in cash. In this case Hitachi has decided to "buy the cow." Hitachi has been reselling BlueArc for years and accounted for 41% of BlueArc's revenues in fiscal 2011.
Just last week a significant company, Q1 Labs, was acquired by IBM before it filed for an IPO. Q1 is another security software player that has been a hotbed of acquisition activity of late.
There are more companies in the IPO pipeline that might end up in the hands of strategic buyers. Many have carved out a solid position in their niche but are still losing money and/or have inconsistent growth. The names that look most likely to go this route are GlassHouse (Datacenter Technology), In-termolecular (Semiconductor Design Tools), SafeNet (Data Protection Services), BrightCove (Video Software), Angie's List (Online Consumer Services), and Imperva (Database Security.)
COVERAGE AND THE CALENDAR
There’s not much on the calendar and no new IPO stock coverage due from the investment banks. In October we will see lockups come off for Zip Car, Ellie Mae, Sequans, Responsys, 21 Vianet, Boingo, Renren and RPX Corp.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.