PopCap Sale Shows Shaky IPO Market

Another IPO candidate bites the dust. Social gaming company PopCap Games, which was an assumed strong contender for an initial public offering this year, is reportedly in the process of being acquired by Electronic Arts (ERTS).

Seattle-based PopCap, maker of heavily-downloaded mobile device games like Bejeweled and Plants vs. Zombies, is the latest private tech firm opting for a buyout instead of a public offering, underscoring anxiety among venture investors about a weakened IPO market.

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More than 80% of venture capitalists around the world believe that current IPO activity levels are too low, according to a new report from Deloitte and the National Venture Capital Association, which surveyed about 350 early-stage investors from nine different countries.

Despite a succession of recent high-profile IPOs from LinkedIn (LNKD), Yandex (YNDX), and Pandora (P), these offerings comprise just a smattering of buzzy social media companies and aren't representative of the overall tech sector.

"The companies going public successfully are in a very narrow industry window," said Michael Greeley, a general partner at Flybridge Capital Partners. "It doesn't mean that we're not all thinking about an IPO and in discussions with underwriters, but the euphoria around three or four companies going public doesn't translate to everybody else."

According to VentureSource, 11 venture backed companies went public in the first quarter of 2011 and raised $768 million, down from 14 IPOs raising $1.1 billion in the previous quarter.

Rather than going public -- once seen as the gold star for successful start-ups --- companies are increasingly being advised by venture investors and bankers to keep their options open and pursue M&A if the price is right. This is known as a dual-track process.

"In the really froth days, everyone was all in for the IPOs ... it was your only focus and you tried to run the process very quickly," said Mark Selinger, a partner at McDermott Will& Emery, where he advises public and private U.S. and Israeli technology companies. "Now when a good offer comes along, there's more inclination to take it than before."

Besides PopCap Games, other prominent firms that chose a buyout rather than an IPO include Skype -- acquired by Microsoft (MSFT) nine months after filing its S-1 -- and biotech star Advanced BioHealing, which agreed to be purchased a day before its stock was set to begin trading.

Reasons for companies choosing to eschew an IPO are plentiful, say venture capitalists, and include the emergence of a robust market for private shares, the investor pressures of delivering quarterly earnings and increased government regulation, as illustrated by Sarbanes-Oxley.

There's also worry that offerings from smaller companies -- even those who can show solid growth and a history of profitability -- risk becoming a speck of dust on Wall Street.

"People are just looking for the next Amazon (AMZN) and are afraid the smaller ones are going to turn into roadkill when the bubble bursts," Selinger said.

But while a vibrant IPO market is significant to the health of the overall economy, a degree of cautiousness from companies about pursuing public offerings isn't a bad thing.

"Only the best companies should go public," said Warren Lee, a general partner with Canaan Partners. "Less companies pursuing IPOsmight be a realization from the management team and investors that going public in this day and age is something to be seriously considered, and you have to weigh the pros and cons or get acquired."

The PopCap news was driving EA's stock price down almost 4% to $21.76 in early afternoon trading Thursday.