Rush for the Exits

TechFlash reports: Emerging technology executives and investors might soon be partying like it’s 2005. Foley & Lardner LLP, a law firm with offices throughout the U.S., released the results of a national survey of emerging technology executives and investors yesterday. The results show a significant reversal of 2008’s gloomy outlook for company valuations and access to capital.

Seventy-two percent of respondents now expect their company’s valuations to grow in the next two years, whereas only 38 percent of respondents in 2008 expected an increase. Encouragingly, the 2009 results echo the relatively healthy conditions of ’05 and ’06.

Are the golden days of ’05 upon us once again? It’s hard to tell, of course, and if you’ll kindly follow me down the rabbit hole a little further, you'll see why.

Sixty-one percent of the execs (8 percent more than last year) surveyed said a merger or sale is their likely exit strategy now, and 21 percent of them (11 percent more than '08) are accelerating existing M&A transactions.

But why, pray you, would they want to sell now if they expect the valuation of their companies to increase over the next two years? The answer, my friend, is all about the Benjamins, or lack thereof.

“We attribute this data to a cash-flow issue,” Gabor Garai, chair of Foley's Private Equity and Venture Capital Practice explained. “Companies in distressed situations are increasingly looking to the M&A market as a survival strategy as they lack the capital to stay afloat in the current economy.”

So it seems capital acquisition is still a problem. The survey results do show a 9 percent increase in companies that sought or obtained capital in the past year, but this may be misleading because seeking is not necessarily finding.

One more hurdle the sale-thirsty execs will need to jump: How are they going to dress their as-of-yet questionably stable companies for the prom? Acting on the private equity and IPO markets might not be the wisest means to a sale these days (in fact, according to the survey results, “virtually no emerging company executives surveyed (3 percent) plan to test the IPO market”). But the waters are rife with “strategic buyer” sharks, and 77 percent of execs surveyed said they’re throwing chum overboard to get these toothsome fellows interested. Still, the IPO could make a comeback.

“It will be interesting to see how the prevalence of strategic buyers shifts next year if the IPO market becomes more robust and liquidity expands,” said Susan E. Pravda, chair of Foley's Emerging Technologies Industry Team.

What do you think? Are things getting better out there? Do you expect growth and greater access to capital? Have you had access to capital in the past year? What strategy for a sale or merger seems safest these days?

Also, stay tuned as later this evening we will be publishing the third-quarter venture capital numbers from Dow Jones VentureSource. And here's a sneak peak: Things aren't looking too pretty.