The ‘new normal’ in new offerings

Contact: Brenon Daly

Back in the third quarter of 2009, when the economy had pulled through the worst of the recession, we floated the idea that we looked likely to be entering a ‘new normal’ period for tech M&A. The term had been used to characterize a number of segments of the financial world, and we took it to mean that spending on deals wouldn’t be as low as it was earlier in the year, but it wouldn’t be anywhere near as high as it once was, either.

In recent weeks, it has struck us that our new normal description could also extend to another market that has seemingly recovered from the knock it took in last year’s recession: IPOs. In many cases, the new issues that are coming to market are lighter raises and less richly valued than the ones that came before the US economy slumped into its worst decline since the Great Depression. Even companies that once planned to hit the public market but then had to withdraw and, eventually, re-file their paperwork have done so with their eyes on smaller exits.

Take Convio. When the company, which makes on-demand software for nonprofits, initially filed its S-1 back in August 2007, it planned to raise some $86m. It filed another set of IPO papers earlier this year, planning to raise $58m. The one-third cut in offer size comes despite the fact that Convio finished 2009 almost half again the size it was in 2007 ($63m in 2009 revenue, compared to $43m in 2007). GlassHouse Technologies and Fabrinet are two other examples of vendors that also cut the size of their offerings in their latest efforts to go public.

As for initial valuations, we seem to be entering a new normal phase for debutants, as well. For instance, Meru Networks set its expected price range of $13-$15 per share earlier this month. Assuming it prices at the high end of the range, the wireless LAN provider, which will have just 14.9 million shares outstanding after the offering, would start its life on the Nasdaq at a market cap of just $223m. That’s just 3x the $70m in revenue it recorded in 2009. In comparison, rival Aruba Networks trades at more than 5x trailing sales.