Contact: Brenon Daly
Even though M&A activity so far this year has remained rather muted, startups are still seeing a trade sale as the likely exit for their business. In a survey that Montgomery & Co released at its ninth annual technology conference last week, a full three-quarters (73%) of the startups indicated that a sale of their business was the ‘most likely exit path.’ That was more than 10 times the percentage of respondents (7%) who said an IPO was the ‘most likely’ outcome.
The responses, which came from a selection of the 180 companies that presented during the two-day Montgomery conference, also indicated that business is picking up. Six out of 10 (61%) predicted a significant improvement in business in the first half of this year compared with the back half of 2011. A further 25% projected moderate improvement. When it came to putting a number on that, nearly half (48%) the respondents said they expected sales to at least double in 2012.
However, whether that bullishness comes through in the prices these startups ultimately fetch in trade sales is less certain. In our survey last December of corporate developer executives – the main buyers of these startups – nearly four out of 10 (39%) indicated that they expected the M&A valuation of startups to decline in 2012. That level was actually slightly higher than the percentage who forecasted an increase – the first time that has happened in three years.
These differing views between the buyers and sellers in the tech market are creating a valuation gap, which goes some distance toward explaining why M&A spending so far this year is running only slightly more than half the level it was at the same time last year. In all five years of our survey, corporate development executives have highlighted the ‘bid/ask spread’ as the single biggest M&A pain point for them.