As the new year approaches, finance chiefs at young firms are hoping for a revival in the long-depressed market for initial public offerings. There have been some positive signs of late: 32 IPOs have been launched in the current quarter through December 16, more than 10 times the volume of last year’s final months. But weakness remains: seven companies pulled their offerings in the quarter because of lack of interest, and five of the six stocks that debuted in December priced below expectations.
In this skittish market, confidence in a company’s ability to hit its numbers is more important than ever when thinking about going public, said Benjamin Nye, a managing director at Bain Capital Ventures and one of five dealmakers participating in a recent Directors’ Roundtable panel discussion on evaluating IPOs. “Missing your first quarter out of the box sets you up for capital punishment in the market,” he said. “If you don’t have visibility into the business, don’t go public.”
John McCarthy, finance chief at biotech company Microbia and a fellow panelist, agreed that managing investors’ expectations is “paramount.” Yet providing reliable guidance is often challenging for a young business, and has only grown more so in today’s volatile market, he added.
Setting reasonable expectations is critical from the earliest stages of the IPO process, concurred the panelists. Bruce Johnston, a managing director at private-equity firm TA Associates, said it can be challenging to work with management teams to determine a company’s value prior to a public offering. “It’s easy for people who are very tied up in a business personally to want to believe in a higher valuation, but they’re setting themselves up to fail,” he said. “If you go out high, it’s hard to meet those expectations.”
“You’re always going to get credit from Wall Street if you underpromise and overdeliver,” added Marc Thompson, head of software investment banking at Oppenheimer & Co. “If you forecast 40% top-line growth, you may not necessarily get credit for all of that, but then you’re under pressure to deliver it.”
Thompson advised those who are considering a public offering to think about hedging their bets by pursuing a so-called dual-track strategy, in which they court strategic buyers while simultaneously preparing for an IPO. The approach was used successfully during the dot-com boom in the 1990s, said Thompson, although he conceded the market has changed dramatically since then.
But Johnston warned that a dual-track strategy can be a draining, time-consuming task for the management team. Still, he said, sometimes the act of filing an S-1, indicating plans to go public, can “draw strategic buyers out of the woodwork.” With the market in 2010 looking anything but certain, such contingency planning will likely serve CFOs well.
Correction: An earlier version of this story incorrectly identified Bruce Johnston of TA Associates. CFO regrets the error.