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Going public? Think again
By Jenny
C. McCune Bankrate.com
 Hey
buddy, can you spare a few dimes for an IPO?
The first-quarter stock market tumble put the brakes
on initial public offerings (IPOs), dashing the big-buck dreams
of some entrepreneurs.
IPOs almost disappeared as a form of financing in
the first three months of the year, according to new figures from
VentureOne, the San Francisco-based venture capital research firm.
At the same time, merger-and-acquisition activity has fallen off.
Those events have made it harder for venture-backed companies to
pay back their investors and for their founders to cash in.
The normal progression for a high-flying startup
is to land investment from one or several venture capitalists and
then go public within five years or so. Going public raises the
funds to pay off the venture capitalists and gives the company founder
a chance to reap what he's sowed. That is, if the company is successful,
the founder can cash out. Or, if an IPO isn't in the cards, the
startup can repay investors by being acquired for a hefty fee.
What was normal last year, though, is now a rarity.
IPOs go poof
In the first quarter of 2001, only five companies completed IPOs,
while 40 withdrew their filings. That compares to the 70 companies
that went public in the same quarter last year.
Just as fewer companies went public, the amount they
raised also decreased. That's in part because of the lower number
of IPOs, but also because companies are being valued more realistically
than last year -- without the gas of the dot-com bubble.
The amount they collectively raised by going public
in the first quarter -- $467.5 million -- was the first time in
two years that the combined value of the quarter's IPOs failed to
break the billion-dollar mark.
Individual companies also felt the effect of a falling
stock market. The one Internet company that went public -- Loudcloud
-- had to reduce its offering terms several times. Eventually, investors
bit and the company raised $150 million. The median amount raised
hasn't changed by much -- $82.5 million in the 2001 first quarter
vs. $90 million for the same period of last year. However, a VentureOne
representative says, "What's important to realize is that the companies
that are going public today are worth what they're getting, unlike
last year."
Of the brave few that went public in the first quarter,
Loudcloud was the only Internet company. None of the IPO firms was
involved with e-commerce, compared to four e-commerce ventures that
went public in the first quarter of 2000. The actual heyday for
e-commerce IPOs was in the fourth quarter of 1999, when 11 e-commerce
concerns went public, VentureOne says.
With the exception of Loudcloud, the rest of the going-public
crowd in the first quarter hailed from the health care industry.
"Health care is the bright spot this year after several years of
being in the doldrums," the VentureOne representative says.
Merger and acquisition activity was also down 10 percent
from the previous quarter's 75 transactions. This was the second
quarter in a row when M&A activity decreased. In fact, it dropped
enough to bring M&A activity to 1999 levels.
While the drop in M&A activity was minimal compared
to the cliff-like drop-off in IPOs, what's most telling is how the
size of such transactions dropped sharply compared to the last quarter
of 2000. Transactions for the first quarter of 2000 were valued
at about $6 billion, a 45-percent reduction from what was paid at
the end of 2000.
Information technology companies continued to be popular
acquisition targets. Eight of the 10 largest acquisitions were of
IT companies, with the other two were in the health care field.
Part of the reason for the slowdown in M&A activity:
public companies, because their stock price has tanked, have less
capital available for acquisitions.
But even if the market recovers and M&A activities
begins to increase, John Gabbert, VentureOne's director of research
at VentureOne, says "the amount paid in those transactions won't
necessarily return to the levels we saw last year."
Of course, most observers point out that the stock
market is cyclical. What's going on now is a downturn in IPOs, not
their death. The IPO market will rise again, but it will require
a healthier stock market and more-receptive investors before that
happens.
Jenny C.
McCune is a contributing editor based in Montana.
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