IPO activity has been on the rise in growing markets as companies seek to expand and innovate
By IBISWorld Industry Analyst Andrew Krabeepetcharat
Fast-growing companies in technology and healthcare industries have been engaging in an increasing number of initial public offerings (IPOs) and are expected to continue doing so during the next five years. Successful IPOs in the tech and healthcare sectors keep the industries growing and incentivizes new start-ups with innovative technology and solutions to push for growth. IPOs often indicate that an industry is in the growth phase of its life cycle; new technology and a fast-growing number of enterprises are characteristics of an industry that is set to expand in the future.
Many tech- and healthcare-related companies are issuing IPOs to raise capital, monetize early investments and become publicly traded. These factors are allowing companies to access more potential investors for reinvestment in working capital, future growth or settlement of debt. Also, IPOs are allowing firms to better facilitate mergers and acquisitions (M&As) through the exchange of stock shares. Certain segments of technology and healthcare are growing faster than others, paving the way for new IPOs and investment in the following markets.
The expanding cloud
Cloud computing is one of the fastest-growing trends within the technology sector. The cloud is similar to the time-sharing of mainframe computing resources, but rather than a single mainframe, a cluster of computers is virtualized into a single computing entity. The entity’s resources can then be divided and distributed on an as-needed basis to clients, who pay based on their needs or usage. This new technology has become a fast-growing portion of many large operators within the Data Processing and Hosting industry. International Business Machines (IBM) and Hewlett- Packard (HP) have both heavily integrated cloud computing into the data processing and hosting services they already offer. As a result, this segment has experienced tremendous revenue growth in the past few years, spurring a number of IPOs among cloud technology companies as they look to garner funds and expand.
New companies that are pursuing fast-growing product segments in technology are engaging in IPOs to grow their companies and expand their client bases, especially in the Data Processing and Hosting industry. IBISWorld estimates that the industry’s revenue grew at an annualized rate of 2.4% to $81.3 billion in the five years to 2012, including a 5.9% increase in 2012. The recent year’s high growth reflects a stronger economy and an increase in the use of industry products, paving the way for new entrants and potential IPOs. A recent example of a cloud-based technology company that issued its IPO in 2012 is Synacor Inc. The company offers a platform that uses cloud technology to enable cable, satellite and telecom and consumer electronics industries to deliver digital content to consumers.
All but the largest software companies have been hard pressed to develop software across all of the aforementioned platforms, leading to increasing specialization and differentiation between software publishers. Growing specialization has been opening the industry to new entrants and spurring IPOs among software companies looking for eager investors to funds their expansion during the past five years. Advancements in the Semiconductor and Circuit Manufacturing industry and the Telecommunication Networking Equipment Manufacturing industry have opened up new software markets. Faster semiconductor chips and wireless networks allow software publishers to explore new software capabilities and uses. For instance, Ford’s Sync system developed by Microsoft allows drivers to get directions, send text messages, receive traffic alerts and make phone calls while driving in their cars. Similarly, smartphones like Apple’s iPhone have been bringing internet-based content and sophisticated software to consumers’ pockets. Each of these innovations opens up new platforms where users interact with software that enhances their daily lives.
As industry firms stepped up their investments in software, computers and smartphones, IBISWorld estimates the Software Publishing industry has grown dynamically. In the five years to 2012, revenue rose an estimated 4.5% per year on average to $182.7 billion, including 5.3% in 2012.. One such company is San Mateo, CA-based Guidewire Software Inc., which develops back-end software for property and casualty insurance carriers. Insurers use Guidewire’s software to integrate operations involving policies, billing and claims. The company raised $100.0 million in an IPO and began to be publicly traded in January 2012.
Medical device developments
The Medical Device Manufacturing industry has enjoyed strong revenue growth recently and is forecast to continue expanding in the years ahead. The US economic downturn did little to deter hospitals and other customers from purchasing medical devices. In fact, the number of industry companies that increased sales in 2008 and 2009 outnumbered those that experienced declines. Since 2007, IBISWorld estimates revenue increased at an average annual rate of 12.8%, even with slowed growth of 7.4% in 2012. The aging US population is a major factor driving industry demand because the occurrence of health issues that require medical devices is higher in the elderly population. This demographic is forecast to expand further as a percentage of the total population over the next five years, which will help maintain industry revenue growth and continue to attract new entrants.
Meanwhile, robust M&A and IPO activity continues to reshape the industry’s competitive landscape as a whole. An example of a recent IPO is by Globus Medical, a medical device manufacturer that develops products for patients with spine disorders. Globus has developed more than 100 products and currently has more than 30 in development. Successful expansion, like Globus’, is attracting new entrants to the industry. And as these companies grow and contribute to the industry’s healthy revenue growth, the number of IPOs in the industry is projected to rise over the next five years.
Overall, IBISWorld forecasts that the number of IPOs in tech- and healthcare-related industries will grow over the next five years as these industries seek to fund company expansions and rapid innovation in products and services. Revenue growth in these industries will also attract new entrants and, thus, increase the number of IPOs.
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