For owners of plastics companies looking for an exit for their investment, the initial public offering market turned out in 2005 to lag far behind merger and acquisition exits.
For example, in the world of venture capital-backed companies, only 41 venture-backed companies exited in 2005 through IPOs, raising only $2.2 billion, compared with 356 venture capital-backed companies that exited through M&As, which were sold for $27.3 billion.
Although the number of acquisitions in 2005 was down from the 407 venture-backed acquisitions in 2004, the median amount paid in 2005 for these firms rose 21 percent to $47.5 million.
Unfortunately, plastics companies are not high on the list of industries either going public or sold through M&As. According to investment data firm Venture One, the companies most sought after in M&A transactions were information technology companies, representing 221, or 62 percent, of the 356 M&A deals with a value of $11.7 billion, or 42 percent, of the dollar total. Health-care companies were also popular targets, representing 71, or 20 percent, of the total number of deals, with a value of $9.4 billion, or 34 percent, of the dollar total. The highest valuations were placed on biotechnology firms.
There has been considerable comment about the causes for this dramatic imbalance between IPOs and M&A exits. First of all, underwriters of IPOs are more conservative than they were in the 1995-2000 time frame. Also, the size of an IPO candidate in terms of its revenues and market capitalization is significantly larger today than in the 1995-2000 period. According to Mark Zanoli, managing director for Tech Banking at J.P. Morgan Securities, a company today needs close to $100 million in annual revenues and a potential stock market value of at least $250 million to stage a successful IPO.
Also, the increased cost of compliance with the Sarbanes- Oxley Act has caused some venture funds to redirect their portfolio companies toward an M&A rather than an IPO exit.
Looking ahead to 2006, the experts feel there will be more growth stocks going public, but not necessarily plastics companies. Richard Peterson, market strategist with Thomson Financial, states that he expects a big push in financials, energy, defense-related technology and security software. There has been a noticeable lack of plastics companies in the mix of industries going public.
Most new issues were in drugs and biotechnology, health-care equipment and services, diversified financials, retailing, and business services and supplies. Accordingly, plastics companies' investors looking for an exit strategy are more likely to find the M&A route a viable avenue for liquidity.
Petillon is a partner of Darden & Petillon in Torrance, Calif., a consulting firm advising companies in mergers and acquisitions.