Many tech start-ups shun buyouts in favour of IPOs

PHOTO: Many tech start-ups shun buyouts in favour of IPOs

NEW YORK - Lured by the promise of red-hot valuations and the chance to run their own companies, the CEOs of many tech start-ups are resisting the urge to cash out through a sale and are opting to go public instead.

Four sources familiar with the matter said recently that over the past year several tech start-ups, including cybersecurity company FireEye Inc, Big Data company Cloudera and cloud storage firm Box, rejected buyout bids in favour of initial public offerings (IPOs) in the future.

FireEye, which went public last month and had revenue of US$61.6 million in the first half of 2013, saw its stock rise 80 per cent in its market debut and is now worth nearly US$5 billion. Cisco Systems Inc had offered to buy the company before the IPO for US$2 billion to US$3 billion, the sources said.

Similarly, Cloudera rebuffed a buyout offer from IBM, while Box rejected a US$500 million takeover bid from cloud-computing software maker Citrix Systems Inc, according to those close to the matter.

Both the start-ups are still private and have revenue well below US$1 billion.

Sumit Agarwal, co-founder of small security start-up Shape Security, said he had rejected a buyout offer for his company as well and was eyeing an IPO as an option.

"Large companies are where innovation goes to die," Mr Agarwal said. "Although acquisition is a very common path for successful start-ups, with rare exceptions going public is vastly more desirable."

Market conditions are ideal now for tech start-ups to hold out. The S&P 500 Information Tech index is up 17 per cent year to date. Investor demand for tech IPOs is high, valuations are rich and it is easier for start-ups to go public, thanks to regulations such as the Jumpstart Our Business Startups, or JOBS, Act.

Signed into law in April last year, the act lets small businesses skirt some expensive securities regulations in their initial years and has been used widely by start-ups.

Microblogging site Twitter, for example, recently filed for a public listing under the JOBS Act, with the prospect of a market value of up to US$11 billion.

The number of US technology IPOs increased to 30 in 2012 from a low of 3 in 2008. This year there have been 26 IPOs so far, according to Thomson Reuters data. Merger and acquisition (M&A) deals in the sector by contrast are at about the same level they were in 2008, totalling US$80 billion worth of transactions in 2008 and US$79.6 billion so far this year.

Gabor Garai, who heads the private equity and venture capital practice at the law firm Foley & Lardner LLP, said he expects proportionally more IPOs than M&As this year than in recent years.

The rush to an IPO comes with its own risks. Groupon Inc rejected a US$6 billion buyout offer from Google Inc in late 2010, hoping it would be valued at more than US$20 billion in public markets.

Instead the company struggled with a crumbling share price and gradual erosion of its daily-deals business after going public. It fired co-founder and CEO Andrew Mason in February this year and now has a market value of US$6.4 billion.

Groupon had declined to comment on the matter.

Reena Aggarwal, an IPO expert at Georgetown University's McDounough School of Business, urged caution but said that unlike the dot-com bubble, this time around tech start-ups had actual revenue and not just clicks.

Bankers, lawyers and industry executives said the interest in going public is growing as a new crop of entrepreneurs who want to build their own large companies comes of age.

"With the success we have seen over the past years with very young founders, be it Google, Facebook, LinkedIn or Groupon, there is some peer validation in going public," said Buz Walters, head of Bank of America Merrill Lynch's venture coverage group.

Enterprise software maker Hortonworks, for example, was built with an IPO in mind and has made it clear to potential buyers that it is not for sale, said CEO Rob Bearden.

"When you're leading a market transformation that will soon impact half of the world's data, there is no time for M&A distraction," Mr Bearden said in an interview. "We will arrive at several key milestones along this journey, one of which will likely be an IPO."

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