2016 has been a particularly slow year for the IPO industry, especially in the technology sector.
The first quarter was the worst for initial public offerings since the depths of the financial crisis. And while things have picked up since then, the deals have all been smaller ones, barely breaking the $1 billion mark.
In tech, for example, the largest IPO of the year — messaging app Line — raised $1.14 billion in July, though much of that came from investors in Tokyo.
But there’s an important reason why that could all change: takeovers.
A wave of takeovers recently has left tech investors flush, as earlier investments are bought out. According to Bloomberg data, there have been about $57 billion in takeovers in the US tech space in the past three months alone. Those deals haven’t closed yet, but investors know they’re getting that cash (and many may have sold out by now anyway).
IPO bankers are betting this translates into demand for new stocks, from the very investors who just cashed out with a sale.
“As long as the M&A market stays like this, I’m not worried about $5-$20 billion market cap-type companies going public next year,” one banker told Business Insider. “There’s still plenty of cash left to put to work.”
Another offered a hypothetical illustration, to show how a single takeover can fund multiple IPOs: If a software-as-a-service company gets bought for $2 billion, for example, and has a public float of 75%, that means that about $1.5 billion of investor money is freed up to be reinvested (before taxes).
Most IPOs are closer to $100 million in size than $1 billion, so that sale alone could give funds enough dry powder to buy into many new deals.
Right now, with so few IPOs available, investors are turning to existing software companies like IBM, which is up 23% over the past six months.
While it’s typical to see more tech mergers and acquisitions than IPOs each year, the difference has been sharper than usual in 2016.
Some recent examples in the software space include Salesforce’s $2.8 billion deal for Demandware, Symantec’s $4.7 billion acquisition of Blue Coat Systems, and Oracle’s $9.3 billion takeover of NetSuite.
And that pickup in M&A could be a good sign for the bigger tech companies — like Snapchat, Dropbox, Airbnb, and Uber — that are expected to go public in 2017 and 2018.
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