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The failure of the Google IPO to sizzle confirms the market wants only steak.
Roy Harris, CFO Magazine
October 1, 2004
For Paul Flanagan, now CFO of a thriving, privately held, Web-based graphic design and printing company called VistaPrint, memories of his last experience with an initial public offering are still vivid.
"It took three years, and a lot of the hair out of my head," he says, recalling the wild ride following StorageNetworks Inc.'s June 2000 offering. The stock price peaked at $154, but went down to a final 2003 liquidation payment below $2 a share. "Of course, it was a completely different time," notes Flanagan, who rose from CFO to CEO in the Waltham, Massachusetts-based company's last few months. "Leading up to that IPO, we were on pace to lose $100 million in a year, and analysts said, 'Don't worry about it; you need to grab as many customers as you can.' "
Today, Flanagan worries. VistaPrint, with its five-year track record, three years of profitability, experienced management, and strong cash position, may look like the ideal IPO candidate. But Flanagan says he would look long and hard at the IPO market before jumping in — paying special attention to the level of cash inflows into mutual funds (which he sees as too weak) and watching for signs that the pricing softness found in recent deals is abating.
"If I were in a position to go public right now, I wouldn't say, 'Let's run to the printer,'" he notes, citing other uncertainties such as the election, oil-price volatility, and Iraq as factors that could dampen a firm's enthusiasm for going public.
After a sharp uptick in filings early in the year, the IPO market slowed again this summer. The somewhat disappointing IPO for Google Inc., with the number of shares offered slashed and the price per share cut from $108$135 to $85, captured the most attention. In Google's shadow, some offerings were withdrawn and others suffered pricing shortfalls.
Late-summer doldrums typically take a toll on IPO activity, as Wall Streeters take their vacations. This year, though, the remaining market-watchers were left to speculate about whether corporate filings in 2005 would resume the more active pace of the first half of 2004, when 228 companies filed for offerings, up from a mere 23 the year before. Also of interest: would IPO withdrawals taper off, reversing the trend in which many more deals were withdrawn after the midyear mark? (See "IPOs at the Crossroads," at the end of this article.)
Of course, the added expense and delays associated with going public in the post-Enron regulatory environment have boosted the prospects for non-IPO capitalization for some time — leading more private companies to seek a buyer instead — so fewer entrepreneurs automatically tailor their business plans for an IPO exit strategy. "In this day of Sarbanes-Oxley oversight and regulation, the cost of going public is $4 million, even for the smallest companies," says David Lavallee of boutique investment-banker Revolution Partners. He sees higher multiples, especially in the high-tech sector, suggesting that being acquired is becoming a more popular scenario for small private firms. Nonetheless, most experts expect some level of increase year-to-year in 2004 IPO activity.
As for whether Google might stimulate the IPO market after the summer slump, the experts are divided. Alexander D. Lynch, a New York-based partner at Weil, Gotshal & Manges LLP who specializes in IPOs, believes the Google "coattails are going to extend only to other search-related companies." Its use of multiple stock classes will be especially hard for other new public companies to repeat in this environment. "It won't work unless the star power of the deal is so great that classes don't matter to investors," he says. But Graeme Howard, president of the Corporate Finance Institute Inc.'s IPO Vital Signs in Chestertown, Maryland, expects "a halo effect from the Google IPO" to help start an IPO resurgence right away. A full-fledged rebound will come after Inauguration Day, "as the new year's first IPO road shows reach their climax. I predict that 2005 will be a strong IPO market, with greater emphasis on economics and less investor mental shelf space allocated to domestic politics and Iraq," says Howard. "The smart CFO," he adds, "will be preparing now to file in February or March," drawing on their calendar-year financials.
A strategy of waiting out a second-half slowdown paid off last year for Eyetech Pharmaceuticals Inc.'s IPO. After filing last September, says CFO Glenn Sblendorio, "the market got very sluggish," leading the New York-based company to abandon its original plan for launching the IPO before year-end. "When we finally launched in early January," he says, "there was more enthusiasm for the story."
Lots more. Eyetech's offering was about 30 times oversubscribed, and interest in the stock has continued strong, with shares consistently exceeding the $30 first-day trading value, well above the $18-to-$20 offering range. The biopharmaceutical company even followed its IPO with a secondary offering several months later, before the first offering's lockup had expired.
Sblendorio notes that Eyetech had a major advantage: an alliance with powerhouse Pfizer Inc., which is interested in Eyetech's Macugen, a drug that targets macular degeneration. Says Sblendorio of the company's decision to forge an alliance before its IPO: "Going it alone means much more profitability, [but] having a strong financial partner, and the credibility of a Pfizer to sign off on your drug, means a lot." The Eyetech CFO was on the other side of the alliance proposition in three years as senior vice president and CFO at Sony Interactive Entertainment in the mid-1990s, when PlayStation was launched. "We were the big brother there," he says, "when a number of companies were looking for licenses."
Sblendorio, too, expects a pickup in IPOs early next year. "The general anxiety in the market will diminish after the election," he predicts. But for now, "I would sympathize with anybody going into this market."
Visions of Grandeur Past?
While VistaPrint hasn't decided whether to pursue a public offering, it knows it is a candidate in the market's eyes. "We're not a start-up or an early-stage company," says CFO Flanagan. But theoretically, "we've got a company that will be in a position to test the public markets. We've had a great five-year run. We don't need the cash right now, and we don't have investors pressuring us to go public," he says, especially praising the patience of VistaPrint's main venture-capital investor, Highland Capital Partners. While Sarbanes-Oxley has introduced additional considerations, he notes, "the actual increased cost of [Sarbox] is more a hurdle you must face — like the fees paid to the lawyer, accountants, investment bankers, printers — than a major deciding factor."
Not everyone thinks the bad old days are gone for good. The "pop" of Google shares above $100 since its IPO — despite concerns about company prospects — suggests to Peter Fader, a marketing professor at the University of Pennsylvania's Wharton School, that there may be a rekindling of thoughts of IPO grandeur.
"I'm skeptical about IPOs in general," says the professor, who believes that "ego and the hope for a quick buck drive these new stocks with investors." From the corporate perspective, "companies rarely go to market strictly to get access to capital," he adds. "Most of the time, it's a coming-out party."
Roy Harris is senior editor at CFO.