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An Eye-Opening IPO

How network-security company Fortinet pulled off a solid offering in a shaky market.
David McCann, CFO.com | US
February 23, 2010

Some say a recession is only a recession for those unfortunate enough to be out of work. Likewise, a bad year for initial public offerings isn't so bad if your offering is one of the few that shine.

Thus for Fortinet Inc., 2009 was a very good year for an IPO. While many companies stayed on the sidelines, the $250 million network-security software provider went public on November 17, pricing its shares at $12.50, well above the expected range of $9 to $11. Many other offerings floundered last year, with shares quickly falling below their opening price, but Fortinet's stock soared 36% higher on its first day and by year-end was up 41% from the offering price (at press time, it still traded near that level).

The bold pricing "meant that people were listening to and believing our story," says Fortinet finance chief Ken Goldman. Regarding the quick rise in the stock price, he acknowledges that some money may have been left on the table but adds: "Hindsight is great. Who knows where the market is going to go? Based on the demand we saw and who wanted in, in our judgment it was a fair price."

Besides, says Goldman, raising capital wasn't the only motivation for the deal. Fortinet expects that being a public company will boost its visibility with prospective customers, especially large ones. For much of its nine-year history its customer base consisted mostly of small and midsize companies, but now it is targeting big enterprises as well as governments. The attention that will be paid now to its financial results can only help that effort, says Goldman.

Indeed, Fortinet welcomes the scrutiny. For starters, it's sitting on $260 million in cash and has no debt. Its revenue in recessionary 2009 was up 19% from the previous year, and non-GAAP operating income streaked from $4.9 million in 2008 to $35 million. And its potential market is sizable: the company is the leader in unified threat management, one of the fastest-growing segments of network security.

No wonder, then, that the stock offering did so well. Still, why rush into the market in 2009, when most IPO-minded companies were erring on the side of caution and waiting until 2010? "I'm usually against the conventional wisdom," answers Goldman. "Expectation is the best part of a market. No one knew what would happen in 2010, and we decided it would be better to not wait."

In fact, getting the IPO out early made particular sense precisely because other companies were waiting, says Goldman. "I perceived there would be a rash of companies trying to raise money in 2010," he says. "You want to be riding a wave at the beginning rather than at the crest." Doing so ensured that Fortinet had undivided attention from investors and analysts during its IPO road show last fall. "We were pretty much the only technology company on the road at the time," says Goldman.

If Fortinet had questions about when to do the offering, it had no doubt about whether. Company management strongly believed that going public was the option that would provide the most value to shareholders, says Goldman. He adds that since he joined Fortinet in 2007, management has been determined to remain independent, whether as a public company or private.

The IPO was Goldman's third as finance chief of a technology company, following VLSI Technology in 1983 and Excite@home in 1997. The process has changed in some ways since then, of course, and not just the spike in financial and legal due-diligence efforts. Goldman says one of the biggest differences in doing an IPO today is the ability to put presentations on the Web, enabling interested parties to learn about the company before an in-person meeting. "The dialogue becomes more interesting and informative," he says.

A strong start in promoting an upcoming IPO is often undervalued, Goldman adds. While some companies may look at European stops in a road show as a training exercise for the U.S. portion, Fortinet viewed the early meetings in Europe as the most important ones of all. "We created momentum and excitement early in the process," he says.

It's been four years since Goldman last worked in a public company, as CFO of Siebel Systems, which was acquired by Oracle in 2006. How does he feel about leaving the peaceful private sphere for the public arena? "I'm fine with it," he says. "It's the real world."




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