Where there is an action there is an equal and opposite reaction.
The action in this case was Sarbanes-Oxley and its onerous reporting requirements for small public companies, which basically killed the small IPOs in the US. The reaction, as predicted at this site earlier, was an increase in mergers and acquisitions as an alternative exit strategy for equity investors in start-up deals. Red Herring reports that M&A activity is up 23% for techie businesses.
IT service companies saw a large jump in transaction activity, rising 50 percent during the first half of the year. Acquisitions in the service sector are considered to be a leading indicator of IT investment. Valuations in the sector went up 37.5 percent....
The reaction to the reaction is a sharp increase in VC investments during the same quarter. VCs are flush with cash and looking for deals that can provide a large, relatively quick return. If they cannot get them from IPOs, M&As work just as well. Higher valuations for these acquisitions seem to have the VCs licking their chops.
Do not expect this current pattern of exit through acquisition to end any time soon. Sarbanes-Oxley is here to stay without any changes for smaller firms. The accounting industry is gearing up a public relations campaign to illustrate how important it is to keep a close eye on even the smallest public company.
Also, it is important to keep in minds that Sarbanes-Oxley created a new agency (imagine that) called the Public Company Accounting Oversight Board (PCAOB). The PCAOB board is appointed by the five members of the Security and Exchange Commission. In addition to being a clear constitutional problem this also assures that the lawyers and accountants who control the SEC will keep Sarbanes-Oxley a cash cow for their brothers and sisters in the big private law and accountings firms.
