Venture capital-backed companies commanded healthy prices in mergers and acquisitions in 2005, with $27.3 billion paid for 356 U.S. firms – the highest total amount paid in a single year since 2000, according to a national survey.
Though the number of acquisitions was down from the 407 venture-backed company acquisitions in 2004, the median amount paid for startup firms rose 21 percent to $47.5 million, according to VentureOne, a company that compiles financial and investment data on the venture capital industry.
Information technology companies proved to be among the most sought after firms by acquiring companies, representing 221 of the deals that occurred in 2005. The total amount paid for those companies was $11.7 billion.
Venture-backed health care companies were also popular, representing 71 of the year's acquisitions and $9.4 billion of the total paid.
The highest valuations were placed on biotechnology firms, as larger pharmaceutical and biotech companies tried to replenish shrinking pipelines of new medicines by gobbling up startups with promising drug candidates, said Josh Grove, a research analyst with VentureOne.
The median venture-backed company that was acquired last year raised about $23 million in venture funding before it was acquired for an median price of $47.5 million.
In contrast, the median venture-backed biotech that was acquired last year raised about $25 million in venture funding before it was acquired for an median price of about $120 million.
However, the figures for biotech companies may be skewed because some of the acquisitions involved payments that are given only when various milestones are achieved.
The largest acquisition of 2005 was for La Jolla-based Angiosyn, a biotech that was acquired by Pfizer last January in a deal worth up to $527 million, according to the VentureOne survey.
But the deal was not so clear-cut: in reality, Pfizer paid a much smaller, undisclosed upfront fee for Angiosyn, which has an experimental treatment for blindness in early development.
The full $527 million won't be paid to Angiosyn's investors unless the drug progresses successfully through several stages of human testing and wins Food and Drug Administration approval – a process that could take years.
Yet whether venture capitalists get their money all at once or over a period of years, it's clear they preferred acquisitions over initial public offerings as the path to investor liquidity, said Grove.
"M&A is a much more lucrative exit for them right now," said Grove. "It is hard to say whether a window will open up again where we'll see strong IPO activity, but I think M&A will remain the more popular exit in 2006."
There were 41 IPOs among U.S. venture-backed companies last year, and they raised a total of $2.2 billion. That is less than half the $5.0 billion raised by 67 venture-backed IPO companies in 2004.
While the number of exits in the public markets declined from a year ago, there were still more venture-backed IPOs in the U.S. in 2005 raising more capital, than there were in the years 2001, 2002 or 2003, said Steve Harmston, director of global research for VentureOne.
Health care companies led the IPO pack, with 21 companies raising $1 billion through public offerings.
Penni Crabtree: (619) 293-1237; penni.crabtree@uniontrib.com
