Where Are the Tech IPOs?
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As managing director and head of global technology investment banking at Morgan Stanley, Michael Grimes is one of the tech industry’s most prominent bankers.
He sat down with Wall Street Journal Financial Editor Dennis Berman to discuss the dearth of tech initial public offerings and why he thinks that’s about to change.
Here are edited excerpts:
Pent-up demand
MR. BERMAN: You’re arguably the most important banker in Silicon Valley. So where are the IPOs?
MR. GRIMES: They’re coming. There have been 14 so far this year in tech, which is down from an average of 35 to 40—and probably over 40 for multiple years since 2004. I’d say next year you’re going to be back probably to triple the current volume, about 30 or 40. There’s really robust, pent-up demand right now.
MR. BERMAN: Why haven’t companies in 2016 been willing to sell their shares?
MR. GRIMES: I think there’s a lag effect. If we look back to January-February, if we look back at the prior 12-month class of tech IPOs, 80% of them were trading below issue price. There was a paucity of demand, and that kind of slows the pipeline.
Probably around the April-May time frame, that changed. And it’s taken a while to percolate through. Add in the fact that anybody who wanted to raise money privately in the 2013 to 2015 time frame could, so [many startups] have capital and some have said they can benefit by staying private.
But the market now is really healthy. Demand is probably as high as I’ve seen it. Supply will catch up.
MR. BERMAN: Is there a mismatch between what the price expectations are between the sale side and the buyers?
MR. GRIMES: There has been over the past 12 months, but the mismatch is shrinking.
MR. BERMAN: And where are they meeting? More on the buyer’s side or more on the seller’s side?
MR. GRIMES: They’re starting to meet closer on the seller’s side. It has been on the buyer’s side, for sure. But it has been moving up and it will continue to move up because of the capital being returned to investors from all the M&A activity.
MR. BERMAN: You have some pretty shocking numbers about the amount of money that’s come in, and the amount of money that needs to go out. Can you share?
MR. GRIMES: It’s as wide of a disparity as we’ve seen in 20 years. There has been $125 billion returned through tech M&A, just the cash portion, into the hands of investors last year. Another $75 billion this year so far, so $200 billion or $205 billion cumulative over that year and a half.
If you add up new issuance of all IPOs in tech and all secondary offerings, it’s about $25 billion to $26 billion. So an eight-to-one ratio, double or triple what it has been in a year in the last 15 years.
New buyers emerge
MR. BERMAN: So a big part of this whole equation is M&A. And something fascinating is happening there. Can you explain?
MR. GRIMES: It’s really that the buyers for U.S. tech assets have changed quite a bit, maybe permanently, and this is really new news.
Five to 10 years ago, the tech giants or tech midcaps won most tech assets. What has happened quietly is that they’ve gone from winning 58% to 60% to half that as three new groups of buyers have [emerged].
Private-equity firms are buying public tech companies. They are outbidding strategic buyers, and that’s new. It has upped their win rate.
Then there are foreign buyers. China has gone from $300 million to $40 billion in a $250 billion tech M&A market. That’s a pretty big portion up from a very small portion, so they’re winning, too.
And the most interesting [group is the nontech firms.] General Electric’s Jeff Immelt said at the end of 2013 that if you went to sleep an industrial company, you woke up the next morning a software, data and analytics company. So they’ve always been kind of kicking the tires on tech assets when we have them for sale, but they hadn’t been paying up. Look what has happened in the past year.
MR. BERMAN: They have no other choice, right?
MR. GRIMES: Now they have no choice. They see the imperative. So Verizon Communications wins Fleetmatics Group, and Wal-Mart wins web retailer Jet.com. And they paid up. So they’re up 250% in terms of volume.
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