Tech Firm IPOs Are Growing
With all the Mother’s Day bouquets safely sent, Bill Strauss took a moment last spring to stop and smell the roses -- and caught whiff of a budding opportunity.
The chief executive of San Diego-based Provide Commerce Inc., an online florist that operates Proflowers.com, noticed that as the stock market and economy started to bloom, a pocketful of technology companies like his were going public.
“We always like to pick our heads up after Mother’s Day and see what’s happening,” said Strauss, who founded Provide Commerce in 1998 and kept it alive as countless e-commerce firms established during the tech boom died on the vine.
Last year, he said, “we felt the market was turning.”
So seven months after Mother’s Day, on Dec. 17, shares of Provide Commerce started trading on Nasdaq, raising about $35 million.
A day earlier, online travel service Orbitz Inc. netted $95 million in an initial public offering of its own.
Google Inc. may be the most recognizable start-up to go public since the Internet bubble burst, but more and more tech firms are for the first time in years finding bankers and investors eager to back them in the public markets.
In the first three months of this year, nine technology companies issued IPOs, raising a total of $1.6 billion. In the first quarter of 2003, just one tech company, Telkom, went public, raising $486.5 million.
More are on the way. In March, 13 technology companies notified the Securities and Exchange Commission of their intent to go public, the most in a month since October 2000, according to Thomson Financial.
“It’s not as though banks have been waiting for Google,” said Richard Peterson, chief market strategist with Thomson Financial. “They’re just going ahead and taking advantage of the current environment.”
Driving the resurgence: a stable stock market, good economic growth and demand from investors, particularly institutional buyers such as hedge funds that allocate a portion of their spending to new companies.
Granted, the number of companies and the amounts they are raising seem tiny when compared with the Gold Rush mentality of the late 1990s, when it seemed anyone with a business plan was a billionaire-in-waiting. In the fourth quarter of 1999, for instance, 132 companies raised $17 billion in the public markets.
Unlike then, though, many of the companies going public today have genuine bottom-line profits.
“This time around, the quality of the companies is certainly higher,” said Tom Taulli, author of “Investing in IPOs” and an adjunct professor of corporate finance at USC. “They generally have strong sales growth, seasoned management and a strong, sober business model.”
Provide Commerce, for example, reported a profit of $170,000 on $23 million in sales for the last three months of 2003.
“Back in 1999, we had bankers calling us all the time asking if we wanted to go public, but we just felt we weren’t ready,” Strauss said. “Our criteria was to have predictable revenues and predictable profits.”
Management at Chicago-based Orbitz felt the same way.
“The travel business can be volatile,” said Carol Jouzaitis, spokeswoman for the company, which was founded by five major U.S. airlines six months before the Sept. 11, 2001, terrorist attacks. In the last three months of 2002, Orbitz posted its first profit.
“So the lesson was: When there’s a window of opportunity, take it, because you never know when the next window will come,” Jouzaitis said.
Some companies whose windows closed when the tech bubble burst are getting second chances.
Sirf Technology Holdings Inc. in San Jose initially filed with the SEC to go public in 2000 but held off its IPO until last week, raising $132 million. IPass Inc. in Redwood Shores, Calif., planned an IPO in 2000 but delayed the offering until July, when it raised $98 million.
Companies, however, are finding a tougher audience.
“In 1999, if you had a fairly credible story, you could take a company public,” said Jack Lazar, who was chief financial officer for NetRatings Inc. when the New York company went public in December 1999 and is now CFO for Atheros Communications Inc., a Sunnyvale, Calif., semiconductor company that raised $126 million in its February IPO. “In 2004, you need to show profitability, significant revenue growth, a competitive strategy and positive cash flow right away. There’s definitely more scrutiny from investors now.”
Regulators also are paying more attention, Taulli said.
“The SEC has suspended trading for any stock that shoots up too fast,” he said. “They’re definitely more vigilant now. It’s a much different market compared to four, five years ago, which ultimately is a healthy sign and makes for a more sustainable IPO market.”
Stocks of technology companies that have gone public since Dec. 16, when Orbitz started trading, have been mixed, averaging a 3.7% gain, said analyst John Fitzgibbon of IPODesktop.com. The Nasdaq composite index has gained 1.8% in the same period.
Atheros, which went public at $14 a share, closed at $13.26 on Thursday. Orbitz, issued at $26, closed at $24.51. Provide Commerce’s shares closed at $21.92, up from their opening price of $15. All trade on Nasdaq.
“The aftermarket performance is not breathtaking, but it is outstripping the Nasdaq,” Fitzgibbon said.
Another sign that the market may be more balanced is the mix of companies going public, analysts said. Technology companies made up 86% of all IPOs in the last three months of 1999. Tech companies constituted 23% of all IPOs in the fourth quarter of 2003.
But that doesn’t make the current IPO market risk-free.
“We’re starting to see some underwriters push the envelope,” Taulli said.
A review of recent IPO filings with the SEC shows, for example, that Nanosys Inc., reported a $9.2-million loss for 2003 on $3 million in sales. The Palo Alto company declined to comment, citing the so-called quiet period before its IPO.
Some investors are also throwing caution to the wind. Taulli said he received more than 100 e-mails a day from investors asking how they could buy shares of Google.
“They don’t even know what Google’s financials are, and yet so many people say they want shares,” he said. “The attitude is starting to change. Fear is going away, and greed is starting to take over again.”
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(BEGIN TEXT OF INFOBOX)
From Google’s IPO filing
Included in the company’s filing for an initial public stock offering was a letter from founders Larry Page and Sergey Brin to prospective shareholders. Here are some excerpts.
Google is not a conventional company. We do not intend to become one.... As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same.
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If opportunities arise that might cause us to sacrifice short-term results but are in the best long-term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long-term view.
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We will not shy away from high-risk, high-reward projects because of short-term earnings pressure.... For example, we would fund projects that have a 10% chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange.
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When Sergey and I founded Google, we hoped, but did not expect, it would reach its current size and influence. Our intense and enduring interest was to objectively help people find information efficiently. We also believed that searching and organizing all the world’s information was an unusually important task that should be carried out by a company that is trustworthy and interested in the public good. We believe a well functioning society should have abundant, free and unbiased access to high quality information. Google therefore has a responsibility to the world.
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Our employees, who have named themselves Googlers, are everything.... We provide many unusual benefits for our employees, including meals free of charge, doctors and washing machines. We are careful to consider the long-term advantages to the company of these benefits. Expect us to add benefits rather than pare them down over time. We believe it is easy to be penny-wise and pound-foolish with respect to benefits that can save employees considerable time and improve their health and productivity.
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Our main benefit is a workplace with important projects, where employees can contribute and grow. We are focused on providing an environment where talented, hard-working people are rewarded for their contributions to Google and for making the world a better place.
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Don’t be evil. We believe strongly that in the long term, we will be better served -- as shareholders and in all other ways -- by a company that does good things for the world even if we forgo some short-term gains. This is an important aspect of our culture and is broadly shared within the company.
* Eric [Schmidt, chief executive], Sergey and I intend to operate Google differently, applying the values it has developed as a private company to its future as a public company.
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Larry Page
Sergey Brin
Source: SEC filings
Los Angeles Times
