Waiting for Google takes only an instant when using the popular Internet search engine, but when it comes to the company's much-anticipated initial public offering, investment bankers have been standing by impatiently for weeks on end.
The IPO is expected to raise as much as $2.7 billion for the Mountain View, California, company. But more important to Wall Street, it may pave the way for a broader resurgence in deal making by technology companies while generating as much as $80 million in underwriting fees. That's 15 percent of the $522 million investment banks took in on all equity capital markets deals in the first quarter of 2004, according to New York research firm Dealogic.
Even without Google's IPO, tech deals have rebounded from a severe postbubble drought. The sector generated 7 percent of U.S. investment banking revenue in the six months ended March 31 and nearly 11 percent in the third quarter of 2003, according to Dealogic. That's up from a low of 3.7 percent in 2002's third quarter. These companies also accounted for 14.7 percent of mergers and acquisitions revenue in the most recent quarter, compared with a postbubble low of 6.9 percent in 2002's fourth quarter. And tech produced 25.7 percent of all equity underwriting revenue in last year's third quarter -- up from a low of 0.1 percent in 2002's third quarter -- before leveling off to 13.1 percent for the three months ended March 31 (see graph).
Still, these numbers are nowhere near those reached at the boom's peak. Tech deals supplied 35.2 percent of all banking revenue, 30.1 percent of M&A inflows and 50.1 percent of equity underwriting fees in 2000's first quarter. These levels likely won't be seen again, but there's room for more improvement.
"Back in 1999 and 2000, tech was 50 percent or more of the IPO market," says Kathleen Smith, an analyst at Renaissance Capital, a Greenwich, Connecticut, firm that researches IPOs. Through late April of this year, one quarter of IPOs have been from tech companies, according to Renaissance. "It's tough to say what normal is," says Smith, "but I think tech should probably be 35 percent or so of the market. We haven't seen a full resurgence yet." Google's debut may be overhyped, but it could still spur more tech deals, she adds.
Improved fundamentals lie behind the recent rise in transactions. Tech spending began growing again early last year. Tech stock prices surged, luring more investors to the sector and boosting confidence among executives who had been uncertain about embarking on mergers or acquisitions during the downturn. Among the deals born of this fortuitous cycle were Juniper Networks' $3 billion acquisition last month of NetScreen Technologies and Amphenol Corp.'s $480 million follow-on stock offering in February.
"When investors concluded the worst was behind us, they had an appetite to get into sectors with higher volatility, and technology was one of them," says George Boutros, co-head of global tech banking at Credit Suisse First Boston. "Companies then started feeling more comfortable raising capital, and the capital markets tend to be a leading indicator of M&A activity." Boutros declined to comment on the Google IPO, which CSFB and Morgan Stanley will co-lead.
The rebound is good news for Wall Street firms that have weathered the drought in stock offerings and mergers by underwriting and trading bonds, businesses that have thrived on low interest rates. With rates expected to rise soon, a reawakening of stock and merger deals couldn't come at a better time.