Schnitger Corporation

Exa’s IPO muddies the waters in engineering software

A quick Monday morning check on the stock markets for those of you following Exa’s IPO: Exa’s market makers originally priced the share at between $11 and $13 but ultimately settled at $10 for the public debut on June 28th. That day, over 2 million shares changed hands, with the stock ultimately closing lower at $9.80/share. Since that inauspicious beginning, though, things have been looking a bit better and on Friday, July 6th, the share closed $10.35 after hitting a high of $10.61 the previous week.

This public offering is so interesting because the engineering software space has seen so few IPOs over the last decade. Promising companies are far more likely to be snapped up as acquisitions by an established player, often just before an IPO, than they are to go public. Since we have so few comparables within our space, we need to look at more generic IPO data for comparisons. Seeking Alpha, which tracks the broader financial markets, published an comparison of recent IPOs that concludes that the “most significant” IPOs of the week of June 25th gained an average of 19% while Exa’s gained 6.10%. Seeking Alpha’s sample is hugely diversified, including a Malaysian palm oil producer along with a couple of tech companies in their sample of 12 deals for the week, so it’s by no means a tech-only view. Too, the broad brush includes companies that benefited from a very strong week on the Hong Kong stock exchange, while Exa probably suffered a bit from the generally downbeat NASDAQ atmosphere and the feeling that Facebook’s IPO was an overhyped fiasco — but, still, it would appear that Exa’s IPO was not an unqualified success.

Today Exa is trading at around $10.40, which gives it a market cap of around $135 million, a revenue multiple of 2.8x for the 12 months through April 30. That appears to be near the bottom of the range for engineering software companies, as Dassault Systemes is paying 4x revenue for Gemcom while ANSYS is paying 2.8x revenue for Esterel. The good news for investors is that there’s the possibility of upside for their shares of Exa, especially if the company can improve profitability.

For entrepreneurs, the picture is less clear. Revenue multiples are definitely higher than when Mentor paid 1.6x for Valor in 2010 but are not consistently at the 4x levels that PTC paid for MKS and DS is offering for Gemcom. MKS and Gemcom are key parts of their acquirers’ strategic plans, which likely drove the price up a bit. One possible lesson: aim for a strategic acquirer rather than an IPO. That gold rush is perhaps over. For now. For engineering software. Maybe.

What do you think? Talk to us in the comments section below!

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