Public Opinion

Wait and See

Still, just because a good company can successfully go public in a bad market doesn't necessarily mean it should. When demand for new issues is uncertain, offerings often tend to be priced more conservatively--making the deal less attractive for both the company and its founders. "I would wait it out," advises Jensen. "Any company that goes public in this market is going to leave a lot of money on the table."

New issues are usually priced at a 15 percent discount to comparable public companies. The dotcom frenzy sent discounts into the single digits, but now that demand for new issues is sketchy, they can soar to 50 percent. "Discounts have widened because of the market we're in," concedes Tim Gould, head of the global equity syndicate at Lehman Brothers investment bank. He blames low pricing for a recent spike in the number of delayed or withdrawn offerings. "Companies aren't willing to go based on the valuation they've gotten."

Unfortunately, postponing an offering can be traumatic for even the healthiest of companies. Once the IPO process has begun, the reputation of a company's management--internally and externally--rides on its fruition. "When you come back, it's harder because you're now a failed deal," says Bartlett. "It also crushes morale because you have to go back to all those employees you gave options to and tell them 'Well, we're still private.' "

Worse is the prospect of outright failure--weathering the IPO process only to have your stock price sink. Such a botched offering can scar a company forever. "The risk of failure is huge," says Bartlett. "If you launch priced at $20 a share and six weeks later your stock is at $10, you have less access to capital than you had if you had stayed private. You have no access to VC money [and] public money."

Those who are experiencing the IPO process counsel patience and preparation in guarding against such outcomes. "If somebody came to me early in our life cycle and said 'Let's take you public,' I would have said no," says F. Scott Moody, co-founder, president and CEO of Melbourne, Florida-based AuthenTec. Early in the semiconductor technology company's life cycle, quarterly revenues were too unpredictable for the short-term-oriented public market. "You don't want to go public on a good quarter, then have a bad next quarter."

Instead, Moody, 45, who expects AuthenTec to enter the public market in two years, is readying the company to make the leap, bringing in a CFO with IPO experience and adopting the rigorous financial discipline required of public companies. A premature move? Not in today's market, where it's never too early to build a paper trail that documents relevant financials--or take on the onerous task of preparing SEC-compliant financial statements.

"The best thing you can do is start preparing your financial statements in an SEC-ready format long before you go public," advises MitoKor's Johnson. "Then you can focus on creating value instead of going through the angst of accumulating back records for an S1 filing."

Bartlett seconds that advice, urging companies to do quarterly budgets, monthly P&L statements and business forecasts as if they are already public. "You'll get used to the rigor of the discipline and the process of forecasting," he says. "Too many CEOs forecast their business models for the first time [while] standing in public--a recipe for disaster."

In fact, companies should do more than merely meet current SEC disclosure requirements. It's unlikely that proposals to tighten the deadline for quarterly filings and to improve the transparency of accounting estimates will take effect this year. But investors are already demanding more than the minimum SEC requirements. "The marketplace will make more changes than the SEC or the government ever will," asserts Jensen. "Investors are already looking for greater transparency in financial statements and more disclosure regarding what the company's business model is, as well as who its customers are and how it interacts with them."

Times Are a-Changin'
We all know that the golden days of the IPO market are dead. But how bad is it? Compare the first-half numbers over the past three years:
1H 2000 1H 2001 1H 2002
TOTAL RETURN 45.9% 18.6% 8.6%
FIRST-DAY RETURN 76.5% 15.2% 9.9%
AFTERMARKET RETURN -9.0% 2.5% -2.4%

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This article was originally published in the October 2002 print edition of Entrepreneur with the headline: Public Opinion.

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