Internet IPOs Cashing out on Tech Bubble 2.0

Internet IPOs Cashing out on Tech Bubble 2.0

The Delta Perspective
Authors: Victor Sunyer and Daryl Woo
As Alibaba prepares for its upcoming U.S. initial public offering, one can’t help but wonder if this marks the emergence of Tech Bubble 2.0. The IPO windfall could land the Chinese e-commerce giant $41 billion, eclipsing both Facebook’s $16 billion offering and Visa’s record $19 billion IPO in 2008.
Furthermore, 8 of the top 10 largest internet IPOs (see Figure 1) occurred in the last five years. The average gross offering has also increased to $185 million, and we expect this to gain further traction with the upcoming high-profile Alibaba deal. That’s a lot of action in the digital space.
An array of smaller peers, such as second-largest e-commerce company and Alibaba-backed Chinese group discount website, are also jumping on the bandwagon. At the current rate, we can expect these figures to reach new heights by the end of 2014.
Figure 1: Top 10 internet IPOs and total gross offering

Notes: 1 Excludes Facebook’s IPO; 2 2014 figures based on year-to-date transactions
Source: S&P Capital IQ, Merger Market, Delta Partners analysis

The internet revolution

The rise to fame of Internet companies is not a recent phenomenon. With the exception of the turbulent periods after the Global financial crisis and dot-com burst, the number of M&A and IPO transactions have increased considerably at a compounded annual growth rate (CAGR) of 17.6% and 18.8% respectively. Based on first quarter numbers (see Figure 2), we expect this growth trend to continue in 2014.
Figure 2: Announced internet IPO and M&A transactions since 2000

Source: S&P Capital IQ, Merger Market, Delta Partners analysis

Internet comes into vogue

Investors have also become more bullish on internet businesses compared to their tech peers. The market-weighted NASDAQ composite, often seen as a tech index given the influence of behemoth tech firms (Microsoft, Google, etc.), serves as a suitable benchmark. In comparison, the amount paid for each dollar of revenue and EBITDA in internet M&A transactions is $5.1 and $14.7 respectively, slightly above than the NASDAQ composite.
Moreover, the limitless potential and disruptive nature of internet underpin the higher valuation. For example, online marketplaces not only can provide a fully comprehensive variety of merchandise to consumers but it’s reach, convenience and digital customer experience that collectively justifies the valuation. Mobile eCommerce usage has also been supported by the rising smartphone penetration, with Morgan Stanley targeting global eCommerce sales to reach $1 trillion by 2016.
Exit multiples of internet M&A transactions, however, have declined more than 60% since the dot-com highs. This also led to the convergence towards the NASDAQ composite, indicating a stronger alignment with the tech peers. Together, these observations serve as strong evidence against the doomsayers who claim that we are in another bubble.

Figure 3: Multiples of completed internet M&A transactions and NASDAQ composite index

Source: S&P Capital IQ, Merger Market, Delta Partners analysis
Are we in Tech Bubble 2.0?
Probably not just yet.
Mary Meeker,a partner at the venture capital firm KIeiner Perkins Caufield & Byers, said that IPO of tech stocks are 73% below the 1999 peak in her annual report on Internet trends. Here are two key reasons why valuations are nowhere close to their past irrational levels:
  1. Operational: Most internet companies today, in general, possess stronger fundamentals based on real business models. This provides a sustainable competitive advantage that supports higher valuation figures.
  2. Financial: Valuations are underpinned by an absolute low cost of capital and the investors’ search for growth and yield.

It is therefore always better to look into the details beyond the big picture. Indeed, some firms may be looking to cash in on the optimism. However, unless we cast logic and reason aside, we will unlikely see the same kind of blind euphoria as the dot-com days


Authors' bio:

Victor is a Director at Delta Partners where he works on Corporate Finance and M&A engagements. Victor has over 11 years of experience in M&A, Corporate Finance, Venture Capital and strategic management consulting within technology and telecom engagements in Europe and Middle East. Prior to joining Delta Partners in 2012, Victor worked at UBS Investment Bank in London, Diamond Cluster (now Oliver Wyman) in Barcelona and Proventure Capital Partners where he was a founding partner. Victor has an MBA from INSEAD (Singapore/Fontainebleau) and BBA and MBA with honors from ESADE Business School.

Daryl is an Analyst at the Delta Partners’ Management Advisory practice. He has been working with the Corporate Finance team assisting on due diligence, market assessment and M&A transactions. Prior to joining the firm, he interned as an investment banking analyst in Macquarie Capital, HSBC Global Banking Advisory and DBS Capital Markets. Daryl graduated from the Singapore Management University with a double degree in Accountancy and Business Management.