VideoCraig Rogers spends his days in a place he calls "bulletin--board hell." As vice president and treasurer of Cell Robotics International Inc., an Albuquerque manufacturer of laser-based medical devices, Rogers routinely copes with investment bankers who won't touch his deals and brokers who won't trade shares of Cell Robotics stock.
Since going public in 1995 by merging with a public company, Cell Robotics has failed to muster sufficient revenues to secure a Nasdaq listing, a key to luring market makers that support the stock. "We've been struggling as a stock, but not as a company," says Rogers.
True, Cell Robotics, which is still in the product-development stage, lost $1.5 million in the first nine months of 1998, on sales of $1.1 million. Rogers insists, however, that its prospects are "as bright as anyone's." Still, trading is relegated to an electronic bulletin board, a high-tech version of the pink sheets that used to circulate with details about public companies too small for Nasdaq. Investment policies bar many institutional investors from owning such stocks, and few brokers handle stocks that are not listed.
Far from supplying greater access to capital markets, public status has hampered Cell Robotics. "It's a bit of a misnomer that just because you are public, it will be easier to raise money," Rogers says. Other observers share this jaundiced assessment.
"There is a mystique to being public that a lot of companies chase after, even if it means not trading on one of the major exchanges," says David Farber, former CFO of Magic Cinemas, a movie-theater operator that he and a partner sold to Regal Cinema in 1997 after mulling an initial public offering. "But often, it doesn't make sense. You have all the disadvantages without many of the benefits."
To fund the development of laser devices designed to draw blood samples almost painlessly, Cell Robotics tried on three occasions to sell its stock in secondary offerings. It had to scrap the first attempt and settle instead for a smaller, more-expensive, and more-onerous private placement. Twice afterward, Cell Robotics accepted a hand from Paulson Investment Co., a small, regional firm in Portland, Oregon, that relies in part on brokers making cold calls to lists of potential investors. "In all three cases, we were left with no choice but to accept smaller, lower-priced offerings than expected," says Rogers. "I'm not sure [being public] has helped us much," he adds.
Cautionary tales seldom hinder managers drawn to visions of bountiful equity markets. Who can blame them, especially now? Equity markets have never been richer or success stories more prominent. News of one--Priceline.com, which zoomed recently from $16 to $69 on its first day as a public company, before ever claiming a nickel of profit-- eclipses dozens of dismal outings by companies like Cell Robotics.
Too Early?
Meanwhile, with visions of mansions in Palm Beach, investors are fanning the trend. "If a company has access to cheap capital in the public market, it should jump at it," says James Melcher, president of Balestra Capital Ltd., a New York asset management firm. By his lights, companies should launch IPOs "as soon as possible" in some cases, before venture capital firms seize control in exchange for capital.
An increasing body of evidence suggests, however, that public venues are much less congenial than managers of fledgling public companies want to believe. Cumulative returns for all companies that went public between January 1, 1986, and August 31, 1996, trailed the overall market in their first three years as public companies, according to Ernst & Young LLP. A separate study, by Broadview International LLC, a mergers-and-acquisitions investment bank, concluded that more than half of all technology IPOs since 1992 currently trade below their offering prices. The Ernst & Young study suggests why: Nearly two thirds of the companies that floundered after an IPO were not adequately prepared for going public, their managers admit.
Many of these managers viewed going public as an end in itself, says Joseph Muscat, national director of Ernst & Young's IPO advisory services. "Winners and losers are not decided on the first day," he warns. Managers should view going public as a process rather than a transaction, he argues. The most successful IPOs are ones that "weigh the time and preparedness of the company against the opportunity in the capital markets," according to Muscat.
Fallen Angel
Far from opening a path to easy street, going public too soon sends many companies careening into potholes. Even routine scrutiny can sap managers' time and energy, and IPOs often face far worse. Because IPOs are hitched to high growth expectations, investors do not take kindly to disappointments, even slight ones. "Because of the high premiums paid, investors expect very high returns," says Paul Deninger, Broadview International's chairman and CEO. If the growth rate so much as hiccups, the stock price can tumble. "On our road show, investors made it absolutely clear that the level of tolerance for bad news is one quarter," says John Reiland, CFO of Neon Systems, a software company based in Sugar Land, Texas.
Under pressure to meet quarterly expectations, young companies manage for the short term when they should be focused on longer-term objectives. "Managers don't always make the best decisions under that kind of pressure," warns Dan Brotten, of consulting firm PriceWaterhouseCoopers. And once a company stumbles, investors are generally unforgiving.
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