Waiting in the Wings
There's a glimmer of hope on the horizon as the IPO market looks toward 2004. Despite a gloomy first half of 2003, market insiders are forecasting clear skies for more IPOs in the coming months.
By mid-September 2003, 25 companies had completed IPOs, and 30 more had filed for offerings during the fourth quarter. More than half that activity came during July and August, traditionally quiet months when investment bankers go on vacation and entrepreneurs lie low.
The activity is strong evidence that the public market for new stock is returning, says Scott Wendelin, CEO of Prospect Financial Advisors LLC in Los Angeles and an investment banker for nearly 30 years. "We're seeing a range of companies tap into the market," he says. "This is beginning to be a normal market." In fact, the most striking thing about the market may be that there's nothing really striking about it. Forget the frenzy over telecom, dotcom or high-tech. These days, newly minted stocks are likely from companies in real estate, business services, health care or manufacturing. There is still a notable strength in biotech and pharmaceutical companies, but that's tempered by an array of other offerings.
As the market begins to look more "normal," don't expect to see Internet wunderkinds raking in the dough: The average age of CEOs who scored big was nearly 50. The youngest, at 35, made a paper profit of just $1.7 million when his company went public. Not bad, maybe, but still a far cry from the wealth of the late '90s.
And while very small tech companies haven't experienced a resurgence of IPOs, in what may be a bellwether for technology companies overall, midsize networking hardware manufacturer Netgear Inc. in Santa Clara, California, had a highly successful offering. After withdrawing an IPO registration in 2000, Netgear came back strong in August 2003 with a 26.5 percent first-day gain. "We were in the right position at the right time," says CEO Patrick Lo.
Investment banks are hungry for commissions, and they have a renewed emphasis on business basics like profitability and return on equity, Lo suggests. "We are growing 20 to 25 percent per year, so we were able to talk to over 18 investment banks."
Lo credits three macroeconomic factors for opening the IPO window. He says Netgear (NTGR) watched for an increase in gross domestic product, 13 weeks of positive movement from all three major public markets, and one or two successful technology IPOs. By April, Netgear had seen enough to get excited. And by July, the success of offerings from FormFactor Inc., Digital Theater Systems Inc. and iPass Inc. convinced them the time was right.
While Netgear's first-day gains are not typical of 2003 deals, the overall trend in issue pricing is positive. According to IPOMonitor.com, a Web site that covers IPOs, the average price of IPO shares has increased 29.5 percent, making the current market conditions "exceptional"-the company's highest rating.
Although they represent diverse industries and business models, IPO companies shared several qualities, including profitability, says investment banker Wendelin. "There's no question profitability is first and foremost on the minds of investors. That doesn't mean you need a long history of profits, but the model to get there has to be very obvious and noncontroversial."
As evidence, stock in Accredited Home Lenders Holding Co. (LEND), a residential mortgage loan firm, was up 100 percent over its IPO offering price after trading just six months. The company has grown profits by 307 percent in the last year, posting net income of $25.8 million for the second quarter of 2003. LEND raised just $35.9 million at its IPO in February 2003 but is now worth more than $300 million based on recent share price.
But when it comes to getting investors excited, there's always room for a great story, with or without strong profits. Path 1 Network Technologies Inc. (PNO) in San Diego managed to raise $15.5 million with its June IPO, which had more buyers than shares offered, despite the company's quarterly losses. Says CEO Fred Cary, "We aren't a company that's generating tens of millions in revenue, so I had to take a real leap of faith."
Cary credits the media for generating enough interest in his industry-video on demand-to get investors' attention. Path 1 handily filled rooms with interested investors. But Cary, 53, acknowledges it wasn't hype that got the deal done: "Our age and experience made investors comfortable about taking a shot."