Why aren’t new public tech companies spending IPO cash on M&A?

A decade after going out of fashion after the dot-com crash, the tech IPO has pulsated strongly back on the radar over the last couple of years.

In the public spotlight, Twitter followed Facebook’s lead, raising nearly $2 billion, in part, to fund a trip down the acquisition trail. The good news for ambitious startups – like Twitter, many companies go public to create a war chest from which to acquire smaller companies.

But when you survey the growing wave of newly-minted tech companies, you find a surprising reality – the IPO class of 2012/13 is hardly spending anything on M&A.

It’s a buyers’ market

Sure, Facebook may have been active, buying Face.com for reportedly $50 million to $100 million, not including Instagram for $1 billion prior to its IPO. But Facebook is an outlier.

The top 10 newly-public US tech firms have done just five acquisitions between them since IPO, spending an estimated $134 million on known deal value – just 6.7% of the total $2 billion they raised.

One reason so many Wall Street debutantes are keeping themselves to themselves may be their own trading losses, and the slightly choppy financial waters from which they are floating in the first place.

With large operating losses and without profitability in sight, it would be cavalier for these companies to make significant acquisitions unless a deal was highly strategic.

There are more buyers out there than you think

Will this tight grip on new-found riches be relaxed? Not yet. Few from the new class of 2013/14 tech IPOs are biting. Marketo, Tableau Software, Marin Software and Veeva have all floated since this spring – but none have yet plotted a course for M&A. All except Veeva are making losses. However they are looking at opportunities with strong strategic fit.

For comparison, it is worth recollecting one of the big tech IPOs of the last decade. When Google raised $1.67 billion in 2004, it took it another two years to do its first sizeable acquisition, but that was a game-changer – YouTube for $1.65 billion. Sure, Google did some $100 million deals early on – but they were pocket change compared with the amount it raised. And remember – Google was profitable at the time it floated.

These companies will become acquirers, and we know Europe is strategic for them, but entrepreneurs considering an exit, should also think outside the box. They should of course consider established acquisitive suspects like IBM, Oracle, but also new entrants to the software market such as BT and Accenture, PE-backed roll-up vehicles and emerging well-funded private companies.

Start planning your exit strategy now

Typically, buyers of companies already have some kind of commercial relationship with the companies they snap up.

Other acquirers buy up companies out of sheer competitive threat posed by disruptive startups snapping at their heels.

Getting on the radar of your potential buyer is always paramount in exit planning

But, with the wide range of buyers, it is more important than ever.

Entrepreneurs may now have to recalibrate their exit radar, and this means responding by doing business with and proving value to unfamiliar partners.

Entrepreneurs should not be disheartened numerous exit opportunities await for smart growth companies. But my advice is don’t delay; exit planning should be begun several years out. This affords the time really necessary to form the relationships and strategies that will set clear direction. Like Christmas shopping, don’t leave it until the last minute.

Julie has nearly 15 years experience advising technology, software and digital media companies on M&A, financings and disposals.

Founded in 1991, Results International advises on M&A deals and provides corporate finance advice to marcomms, software, digital media and healthcare businesses in every major market via its worldwide network.