When San Diego-based biotechnology firm MitoKor filed for an IPO
in March 2002, the market for new issues was looking downright
abysmal. Gone were the heady days when "concept
companies" with no revenue to speak of--let alone
profits--debuted to great fanfare and triple-digit first-day
returns. Instead, "newcos," or prospective new issuers
like MitoKor faced a marketplace still reeling from the demise of
the dotcom frenzy, the trauma of terrorism and investors
disillusioned by the Enron debacle--all of which upped the ante for
IPO--bound firms.
"To go public today, you will have to show eight quarters
of solid revenue growth, an organization where costs are controlled
and probably at least four quarters of profitability," asserts
Mark Jensen, partner and national director of venture services at
Deloitte & Touche.
"There's also a tremendous push from investors for
greater transparency with financials," adds Steven Barnes,
principal and CFO at Wayne, Pennsylvania-based venture capital firm
PA Early Stage. "The public market is demanding not just the
numbers, but that you show how they were derived."
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Tried and
True
With IPO hopefuls facing that tall order, small wonder that the
first quarter of 2002 saw just 15 make the private-to-public leap,
compared with 126 in the first quarter of 2000. So what prompted
MitoKor, which posted a net loss of $21 million in 2000, to brave
the plunge? Paradoxically, it's among a handful of companies
that are finding an upside to the IPO market's new outlook.
"In the heady dotcom days, investment bankers were telling us
that no one was interested in biotech because technology was taking
over the world," recounts 40-year-old MitoKor CFO and
management team member Craig Johnson. "We're not hearing
that argument anymore."
"In the IPO
craze two years ago, the median age of companies going public was
three years; today it's 15."
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Too true. Technology firms, which accounted for 70 percent of
public offerings in 1999 and 2000, constituted less than a third of
new offerings in the first quarter of 2002. Instead, the IPO
pipeline spat out more traditional businesses, from spinoffs like
Citigroup's Travelers Property Casualty and Nestle's Alcon
to new entries from mature industries, like air travel's
JetBlue and health care's Medical Staffing Network.
In the current climate, a company's IPO prospects depend
heavily on its market sector's performance, says Rick Bartlett,
co-head of U.S. equity capital markets at investment bank Salomon
Smith Barney. "The IPO market is very sector-specific,"
says Bartlett, who advises companies considering IPOs to gauge
their potential by observing peers in the open market. "If
your company is in a hot growth sector, it can go public."
Proven staying power also factors into the equation. In the IPO
craze two years ago, says Jay R. Ritter, a professor of finance at
the University of Florida at Gainsville who maintains a database on
new offerings, the median age of companies going public was three
years; today it's 15.
On the plus side, those who make the grade are faring relatively
well compared to the overall market. First-day returns for 2002 new
issues after the first half of 2002 are averaging 9.9 percent,
according to Greenwich, Connecticut-based IPO research and
investment firm Renaissance Capital (see "Times Are
a-Changin'"). Even the half-yearly average total return
for 2002 IPO stocks (8.6 percent) starts to look downright rosy
when stacked against today's market figures, points out William
Smith, president and portfolio manager of Renaissance Capital's
IPO Plus Fund. "The performance of 2002 IPOs is far below the
double- and triple-digit jumps we saw in 1999 and 2000," he
says, "but compared with the NASDAQ, down 34.3 percent this
year, that's not bad at all."
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