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New England's Tech IPO Market Looks Forward

Mass High Tech
by M. Benjamin Howe

Friday, December 29, 2006 - While New England's technology IPO activity was up slightly in 2006 compared to 2005, several macro-level forces drove a strong finish to the year and that should have a positive effect on the broader IPO market in 2007. We expect to see a significant increase in tech IPOs in 2007 compared to the post-bubble doldrums, both locally and nationally.

The U.S. IPO market is finishing the year with a strong 4th quarter - 89 IPOs, which is the most we have seen since the 3rd quarter of 2000, the last gasp of the bubble. 228 IPOs have priced this year on U.S. exchanges, compared to 202 in 2005, an overall increase of 13 percent. We believe an abundance of private companies has been on the sidelines during these unfavorable market conditions and are now going, or at least considering going, public. We are also seeing a significant increase in the number of investment banking IPO "bake-offs" for deals that will be filed in the first quarter of 2007. All this empirical evidence bodes well for a strong 2007 IPO market.

This year's U.S. tech IPO market priced 41 deals as of Dec. 21, equal to the 41 deals of 2005. Most notable is the 31-percent increase in tech IPO filings in 2006 compared to 2005. However, tech IPO filings did slow during November and December of this year. Roughly half of the last 21 technology IPOs have realized aftermarket performances in excess of 50 percent. Furthermore, high-growth tech IPOs are trading at a significant premium to their closest comparables. Worth mentioning is that despite the many positive signs of a healthy and growing IPO market for 2007, total tech IPO value ($24 billion) still only equals one-quarter of total tech M&A value (about $100 billion) in 2006.

Here in New England, the tech IPO market has also shown signs of a resurgence in the second half of 2006 and promise for a strong start to 2007. Of note are the recent pricings of three Massachusetts-based companies: Acme Packet Inc. (aftermarket performance of plus-93 percent), IPG Photonics Corp. (plus-49 percent) and Double-Take Software Inc. (plus-10 percent). Of the 10 tech filings in New England in 2006, 7 registered in the second half of the year. The tech IPOs priced this year have, on average, demonstrated a solid aftermarket performance of plus-11 percent. 2005 tech IPOs have performed the same, with an aftermarket performance of plus-12 percent. We are aware of at least 10 New England tech companies that are considering filing during the first half of 2007. We can tell you who these 10 hot IPO candidates are, but we'd rather not put out the welcome mat to our competitors. What we can tell you is that the hot sectors in New England include information security, storage, data/document management, outsourcing and communications equipment. Of particular note are the fast-growing alternative energy companies.

There has been much said of the Alternative Investment Market, London Stock Exchange's alternative, earlier stage IPO market. Although very active, the AIM has underperformed the U.S. tech IPO market -- AIM tech IPOs are down 6 percent since 2004, while U.S. tech IPOs have been up 20 percent over the same time period. The average AIM tech IPO market cap in 2006 was $54 million compared to the average Nasdaq tech IPO market cap of $370 million. The Nasdaq remains the exchange of choice for tech companies, including those based here in New England. In spite of being preferred over the AIM, the Nasdaq needs to be more accessible for $100 million to $300 million market cap companies in order to become more competitive in new issue activity and further open the gates for U.S. technology IPOs. Even the politicians are waking up and considering modifying Sarbanes-Oxley regulations for smaller companies. And why not go public at a $200 million market cap, when 1,900 companies on the Nasdaq (56 percent) are less than $300 million in market capitalization? This would offer another reason, on top of the favorable market conditions listed above, for our local emerging growth tech companies to consider going public.

IPO drivers
The IPO market has responded favorably to:

* the Federal Reserve holding rates for five consecutive meetings at 5.25 percent;
* inflation worries subsiding;
* a strong surge in the stock market;
* exceptional aftermarket performance of recent IPOs;
* lower energy costs;
* strong corporate earnings; and,
* high cash balances and demand from institutional equity investors.

Ben Howe is CEO of America's Growth Capital, a full-service boutique investment bank serving emerging growth technology companies based in Boston. He can be contacted at ben@americasgc.com.