Sunday, August 31, 2003

For IPOs, the thrill is gone

Fewer small firms raise cash by going public

By James McNair
The Cincinnati Enquirer


To the list of things bordering on extinction, add the IPO.

If any one phenomenon characterized the bull market of the 1990s, it was the initial public offering of stock. By the end of 1999, investors noshed over just about anything that Wall Street shoveled out.

Remember eToys, the online retailer that went public at $20 in 1999, quadrupled in value in one day of trading, then went bankrupt less than two years later?

How about or Webvan or Unicapital or Physicians Resource Group?

After four straight years of decline, the IPO market is virtually lifeless.

Investors feasted on 520 initial public offerings in 1999, but just 97 in 2002, according to Thomson Financial.

Through Aug. 20, only 20 U.S. companies have gone public in 2003, compared with 54 at the same point last year. What's more, more than half of the $4 billion raised so far this year went to a mere half-dozen companies. IPOs generated $63.5 billion in 1999.

"Forget about a bear market. This has been a Great Depression for small companies raising money," said Thomas Glaser, president of Glaser Capital Consulting, a Batesville, Ind., firm that helps companies with pre-IPO financing.

Ohio hasn't delivered an IPO since last December, when Ohio Legacy Corp., a Wooster bank, sold 1 million shares at $8.50 each. Indiana's last IPO - Windrose Medical Properties Trust - was more than a year ago. Kentucky's - Regent Communications of Covington - dates to January 2000.

MTC Technologies of Dayton, Ohio, went public before investors became super-serious about a no-IPO diet. The developer of information technology for the military raised $85 million in June 2002.

"We ended up 10 times oversold," said David Gutridge, MTC's chief financial officer who takes over as chief executive in October. "Probably 85 to 90 percent of the people we called wound up taking a piece of the issue. But two weeks after the deal, the market went to hell in a handbasket."

Glaser attributed the IPO drought to several factors. With stock valuations down in general, he said, firms are faring better by raising money privately on a cash-flow basis than by going public with an emphasis on earnings. Also, investors neither have the money nor enthusiasm for IPOs.

"In good times, when people are making money on their investment strategy, they spend money on more speculative things," Glaser said. "In bad times, they're really less apt to put money into IPOs."

He added that going public is less attractive than it was in the 1990s. Financial reporting requirements, executive accountability, director liability and the shareholder expectations have all risen sharply since the pre-Enron, pre-WorldCom era. Glaser estimates that the cost of going public is at least three times what it was five years ago.

Jack Wyant, a managing partner at Blue Chip Venture Co. in Cincinnati, said the collapse of the IPO market has led to a greater reliance on venture capital. Startups that went through three rounds of private financing before going public, he said, are now doing six or seven rounds.

Today's market for financing startups, he said, resembles that of the early 1990s. By the end of the decade, Wyant said, the IPO market was a bubble destined to be burst.

"Companies were going public prematurely or with less history and sometimes without profitability," he said. "Historically, in the early '90s, those companies weren't going public."

Now, Wyant said, the IPO market isn't an option, even for companies that are showing revenue growth and attaining the financial milestones required by underwriters and lead investors.

"Constructively, we (venture capital firms) have displaced the IPO market as a source of capital for an enterprise," he said.

When will the IPO market rebound? The Web site says it already has. Although the number of deals this year is meager, their performance has been strong, it said. Seventeen of 19 class-of-2003 IPOs it looked at rose in value, posting an average gain of 30 percent as of Aug. 8, compared with a combined loss of 9 percent by the class of 2002 at the same time last year.

"IPOs Are Back, Baby!" the site proclaimed last Tuesday.

It's still too soon for Glaser and Wyant to sign that proclamation, although Wyant said Blue Chip's 35 holdings are riper for an IPO than they've been in three years. Glaser said he expects the IPO market to rebound sometime in early 2004.

When that happens, Wyant said, there will be a surge of high-quality issues overdue for public ownership.

"They'll have had more time to prove their models and show they're profitable and show reference-able customers," he said. "When the market comes back, we have five companies that would be candidates to motor out onto the highway of commerce."


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