Venture-backed telecom companies found M&A to be a far more attractive exit strategy than the public markets in 2005, according to Thomson Venture Economics and Dow Jones research unit VentureOne . (See Startup Valuations.)

VentureOne's latest research on private company exits shows that 39 U.S. venture-backed “communications and networking” companies merged with, or were acquired by, other companies during 2005, at an average of $87.5 million per transaction. (See Scientific-Atlanta: Cisco's Sweet Deal?)

But only three such companies -- Fusion Telecommunications International Inc. , Eschelon Telecom Inc. (Nasdaq: ESCH), and Cbeyond Communications (Nasdaq: CBEY) -- completed initial public offerings (IPOs) during 2005, VentureOne says. (See Cbeyond Joins Nasdaq and Eschelon Joins Nasdaq.)

VCs are well aware that the public markets are still a tough place to make an exit, according to Blueprint Ventures partner Bart Schachter. “You have what I call the Vonage or Skype effect where you are either holding out, or getting sold for a very large premium,” Schachter says. "Why would you do an IPO when you know you can get two-and-a-half million in an acquisition?" (See Europe Is M&A Feverish .)

In its public market debut, VOIP and Internet services provider Fusion raised $23.2 million in February. Meanwhile, the enterprise ISP Eschelon raised $75 million in August, and, in November, Cbeyond, a CLEC, raised $73.5 million. (See Expect More IPTV M&A.)But the stocks of these companies haven't done well in post-IPO trading. Only Eschelon’s stock has retained its opening value.

“The conclusion is that you have this stagnant post-IPO market that doesn’t give comfort to investors or companies about what would happen after they went public,” Schachter says.

A notable exception is the Virginia-based telephone number clearinghouse, Neustar Inc. (NYSE: NSR), which raised $605 million in its June IPO. The company's stock opened at $22 per share and finished the year strong at $30.49. (See NeuStar Twinkles on Wall Street.)

Still, foreign companies holding IPOs at U.S. exchanges last year tended to see better long-term results than their U.S.-based counterparts. They both raised more money and were better appreciated by investors after the IPO, according to Thomson.

The Chinese mobile handset designer China Techfaith Wireless Communication Technology Ltd. raised $141.8 million of public money on the Nasdaq in May. UTStarcom Inc. (Nasdaq: UTSI) spinoff Hurray! Solutions Ltd., a Chinese wireless media company, raised $70.5 million on the Nasdaq in February. The Israeli video networking company Scopus Video Networks (Nasdaq: SCOP) raised $31.5 million on the Nasdaq in its December IPO. And the Korean mobile entertainment services company WiderThan raised $72 million on the Nasdaq in a December IPO.

The U.S. telecom sector’s strong M&A numbers seem to be running apace with other U.S. business sectors. VentureOne says U.S. venture-backed companies brought $27.3 billion in 356 transactions in 2005. That’s the highest total amount paid in a single year since 2000 when 458 U.S. companies were acquired for $98.1 billion.

IT companies dominated the M&A activity -- 221 of them exited through an acquisition last year, bringing an aggregate of $11.7 billion.

VentureOne researchers also note that the companies that were acquired in 2005 had to wait an average of 5.4 years from the time of their initial equity financing until their liquidity event. The firm says that’s the longest ramp-up period in more than a decade, and nearly a year longer than companies bought in 2004. (See CMP Acquires Light Reading.)

Looking at the IPO picture across all U.S. industries, VentureOne says 41 U.S. venture-backed companies completed offerings in 2005, raising a combined total of $2.2 billion. That’s less than half the $5 billion that venture-backed companies raised in the 67 IPOs completed in 2004.

— Mark Sullivan, Reporter, Light Reading