By David Shabelman, The Deal, March 26, 2004
Amid a budding revival for initial public offerings this year, there have been no drkoop.com sightings, nor are there any IPOs in the pipeline akin to those of Internet toy retailer eToys Inc. or online grocer WebVan Group Inc., the two other famous Internet “growth stocks” of the late 1990s that ultimately went bust. Such speculative offerings simply aren’t possible these days. In fact, without profits and a high profile in a major technology sector, venture capitalists and entrepreneurs won’t find any takers among public investors. Says Venky Ganesan, a principal at Globespan Capital Partners: “Your average cookie-cutter software company with $40 million to $50 million in revenue isn’t going to go public unless they have a unique story. The underwriters will take you, but you will become a public market orphan, which doesn’t create value for anybody.” Ganesan should know. Earlier this month he dropped plans to seek a public listing in 2005 for one of his firm’s portfolio companies, Trigo Technologies Inc. Instead, he chose to hook up with IBM Corp., which bought the maker of product management software for undisclosed terms March 9.
Ganesan, also a Trigo co-founder, says that despite the improved atmosphere for tech IPOs, the public market still isn’t overly friendly. He says compliance issues instituted in the past few years by federal regulators have made things more difficult. And for companies with market caps below $750 million, it’s tough to get an investment bank to institute research.
Nor is the year’s most eagerly anticipated IPO, Google Inc., going to change the situation. “I think there is a quality filter in the market at this point that’s taking out the crud,” says Tom Taulli, author of “Investing in IPOs” and co-founder of CurrentOfferings.com. “Institutional investors are paying attention to what they’re investing in right now. They want something substantive.”
Taulli says companies that can go public today are profitable or close to profitability, with a significant share of a large market or potential large market, along with a strong management team. Chances are, then, that only a few offerings will make the grade this year, analysts say, despite an improving market.
But that hasn’t stopped preparations. According to Renaissance Capital Corp.’s IPOHome.com, there were 56 new IPO filings in 2004 through March 16, the most in a quarter since 75 companies filed to go public in the fourth quarter of 2000.
These 56 filings compare with only six in the first quarter of 2003 and 105 in all of 2003. Many of the 56 filings are in healthcare or biotech, a tech sector that has always been speculative. In contrast, successful information technology offerings must be more substantial.
Consider Kintera Inc., a software maker for nonprofit organizations that went public in December 2003. It has been the top-performing IPO over the past 12 months, according to IPOHome.com, with a total return of 104% from its offer price as of March 16. The reason: Kintera, which increased its revenue 300% from 2002 to 2003, to $8 million, has several things going for it, including its co-founder and CEO, Harry Gruber, who has taken four other companies public. Teva Pharmaceutical Industries Ltd. bought one of the companies, generic drug maker Sicor Inc., for $3.4 billion last year.
“When we started Kintera, we did things as a company knowing that we would eventually go public,” says Gruber, who explains that the company set up its accounting practices and instituted other standards that a public company would do. Kintera also had a “high-profile” board, according to Gruber, and established relationships with underwriters early on.
Gruber says he thought going public late last year was easier than in some prior years because “in a market like this you have to have your act together.” Yet the CEO predicts companies will begin to push the envelope and see whether the window is open for second-tier companies that may not have all of the prerequisites of the current crop of IPOs.”The playing field may have changed due to the success of Kintera and other companies,” he says. “Whether that will lead to one-step-down companies going public, it’s hard to tell. It’s an experiment all the time with Wall Street.” The market has been on edge to hear Google’s story, though the Mountain View, Calif., company’s search provider has yet to confirm widespread expectations it will go public this year. But analysts say its impact on other tech companies will be minimal. “There aren’t that many more Googles out there,” says Paul Bard, senior analyst with Renaissance Capital. “It will be a positive for the markets, but as for Google being a coming-out party for everyone else, I don’t think that’s the case.”
Still, some companies in the pipeline may do well when they debut. Customer relationship management software company Salesforce.com Inc. of San Francisco is the most anticipated tech offering other than Google and should go public soon. “The recent selloff in the market is making things a little more challenging,” Bard says. “But I still think there are quality companies out there.”
Other tech companies that recently announced IPO plans and are expected to make it to the public markets are Blackbaud Inc. of Charleston, S.C., which designs software for not-for-profit organizations; Blackboard Inc., a Washington, D.C.-based maker of educational software; Blue Nile Inc., an online jewelry retailer operating out of Seattle; and LSI Logic Storage Systems Inc., the Milpitas, Calif.-based spinoff of LSI Logic Corp.’s disk storage systems and components business.
Windows of opportunity for public listings can close quickly, however, as a clutch of high-tech companies from China have learned. Strong gains among Chinese technology companies last year, including Chinadotcom Corp., Sina Corp. and Sohu.com Inc., along with stirring debuts in 2003 from online travel company Ctrip.com International Ltd. and China Life Insurance Co. Ltd., encouraged other Chinese companies to go public this year.
The results suggest interest may be waning. Linktone Ltd., a Shanghai mobile phone service provider that went public March 4, saw its shares rise 24% on its first day of trading but more recently was down 30% from its offer price. Hong Kong-based TOM Online Inc., which provides its products and services through mobile phones, went public a week after Linktone, and its shares are down more than 20% from where they were priced.
The most recent Chinese company to go public also disappointed. Shanghai chipmaker Semiconductor Manufacturing International Corp. never traded above its $17.50 offer price when it made its debut March 17 and closed down 11% its first day on the New York Stock Exchange.
“There was just a lot of supply coming out when the stock market was in a correction,” Taulli says. “There’s still a tremendous amount of interest in China. It just got a little ahead of itself.”
That might happen, too, whenever the shares of Google and Salesforce.com do come to market. But a reviving IPO market, even if it overshoots, does have its benefits for wannabe public companies. Just ask Globespan’s Ganesan. “Going public is a financing event, not a liquidity event,” he says. “What IBM offered Trigo was a financing event and a liquidity event that created a lot of value.”