Second Thoughts

With equity markets plunging, companies that were gunning for IPOs have needed back-up plans.

When Saubermacher, a €205m Austrian waste disposal company, cancelled its debut on the Vienna Stock Exchange last January, chairman Hans Roth blamed stockmarket volatility. But he didn’t rule out a flotation in calmer times. “If a miracle occurs, we could engage in one in the autumn,” he told reporters.

There has been no miracle. Equity markets around the world plummeted as the year progressed, with many registering record drops as the economic outlook worsened. In turn, initial public offerings are scarce: there were 69 in Europe during the third quarter of the year, compared with 183 in the same period of 2007. The number of cancelled IPOs, meanwhile, is rising. (See “Getting Cold Feet” at the end of this article.) “It’s very difficult to price an IPO in a volatile market and you can’t get much more volatile than at the moment,” says Tom Troubridge, head of the London capital markets group at PricewaterhouseCoopers.

Saubermacher was lucky. Erhard Schmidt, its CFO since January, says the company fielded several calls from private-equity groups and other funds interested in backing it for its planned flotation. Those calls continued even as the board hit the IPO road show. “We knew that the stockmarket was our preferred way [to tap funding] but we knew that we also had alternatives,” Schmidt says. After cancelling its IPO, the company used short-term bank credit to invest in expansion until July, when it sold a 28% stake in its business to the UBS Global Asset Management fund.

Failing to float is a disappointment for any company, but in the long run some could benefit, says Simon Amies, a partner in the London office of law firm Covington & Burling. “Whoever survives this period without having to raise money in the markets will show that they have managed to get through a difficult time with private investment or [venture capital] backing, used their resources effectively and executed on their business plan,” he says. “Those companies will be attractive when the market comes back.”

Ready for the Worst

Many companies are not as fortunate as Saubermacher. If there’s a lesson for CFOs from the recent spate of scrapped IPOs, it’s that whatever funding method a company has lined up, it must have an alternative to fall back on. Virginie Lazès, a Paris-based partner of investment bank Bryan Garnier, says that puts pressure on finance chiefs who might once have assumed a stockmarket launch was a guaranteed route to new capital: “Where do you find the money [if the IPO doesn't succeed]?” Lazès asks. “That’s the big question.”

And there are no easy answers. Companies can spend months slaving over the requisite paperwork and investor communications when going public. During that time, it can be difficult enough to keep an eye on the day-to-day business, let alone run another funding project in tandem with the IPO.

But CFOs who rise to the challenge are often glad they did. Sinosol, a German solar-power company, cancelled its €79m IPO on the Frankfurt Stock Exchange in June, blaming market volatility. CFO Raphael Krause, one of the company’s co-founders, describes pulling the deal as “one the toughest days of my life” and an event that took “some weeks” to recover from. No wonder — Krause estimates that costs linked to the IPO process stood at about €1.5m, not an insignificant sum for a company that expects 2008 revenues of about €150m.


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