Money is available, but “it’s very selective,” says KeyBanc’s Gruber. A buyers’ market caused two kinds of IPOs to backfire in 2009 and early 2010. The first were attempts at raising blind pools of capital to buy distressed assets; the second were financial sponsor-backed deals that attempted to sell large chunks of equity at full valuation.
While so-called blank-check companies (created for the purpose of buying other companies) have staged a comeback, private-equity firms have to reset expectations. “The rule of thumb is an IPO discount of 10% to 15% versus the comp group,” says Gruber, “but financial sponsors try to sell through that discount. In a buyers’ market, that doesn’t work.”
On the other hand, investors will open their wallets for companies that deploy equity capital for growth, says Gruber. Companies like Vibrant, a provider of contextual advertising for Websites, could benefit. Vibrant is generating cash, boasts earnings growth in the mid-teens, has no maturing debt, and self-funds its working capital. A June launch seems likely. “We don’t need to raise capital to execute on our strategic plan,” says Vibrant CFO Jeff Babka, who took NeuStar public in 2005. “But we could advance it — through an acquisition — if we had additional capital on our balance sheet.”
Vibrant is establishing a Sarbanes-Oxley compliance program, honing its forecasting process to provide public market guidance, and working with auditors to clearly understand accounting and financial-reporting requirements for its S-1 filing and life as a public company. “If the market isn’t open or we decide to hold off, it’s not as if we are wasting our time doing this. It will all strengthen our business,” Babka says.
While Babka hopes for a home run, he is realistic. “You have to put up some pretty significant metrics,” he says. “It’s also incumbent upon the management team to create a sustainable business model and ensure there’s no subsequent crisis that could leave investors holding the bag.”
As merger-and-acquisition activity heats up, Gruber expects a robust market for secondary offerings, especially for management teams that craft a good story around the use of proceeds. Post “flash-crash,” though, reducing exposure to market risk will be a top priority. Smart companies will limit the hit to trading prices by using overnight trades (launching at market close and pricing before the following morning’s open) or one-day offerings, which give management a day to sell the merits of the deal to the buy side, including new investors. The one-day structure exposes shares to market risk, but “when you have a good use of proceeds, the stock tends to hold in very well and the pricing is as tight versus an overnight,” Gruber says.
Going Long on Debt
Tapping shareholders is not an option for CFO Alexey Kornya of Moscow-based, NYSE-listed Mobile Telesystems. Raising funds in U.S. dollars to finance the build-out of Mobile Telesystems’s 3G infrastructure doesn’t make sense when the Russian ruble is strong and 70% of the company’s liabilities are domestic.