At some point in the IPO process, companies must deal with outside influences, says Jason Kent, an associate at Cooley Godward. (photo/alandeckerphoto.com)

First, the good news: for the second quarter through June 30, IPO pricings increased almost tenfold (960 percent) when compared to the second quarter of 2003. Hoover’s IPO Scorecard reports 53 U.S. companies went public in the second quarter, raising $8.8 billion. A year earlier, five IPOs brought in $1.6 billion. Since the fourth quarter of 2003, the number of IPOs has increased steadily, with this year’s second quarter marking the third consecutive period of quarter-over-quarter increases. In June, IPOs were bustin’ out all over; the 26 IPOs marked the busiest month for IPOs in more than three years.

But now... “The market enthusiasm we entered the year with has sort of waned,” says Adam Lenain, senior counsel with Foley & Lardner. “Initially, there were extremely low interest rates, tax cuts, an improving job market and all those things added up to a bullish view. Look where we are now: uncertainty over Iraq, oil prices, rising interest rates, uncertainty about the election.” The result, says Lenain, is an environment in which investors are asking themselves how much risk they’re willing to tolerate in a game of wait and see.

Since most observers agree that no matter who occupies the White House, we are unlikely to revisit the IPOs Gone Wild days of 1998-2000, growth companies and the attorneys that shepherd them to market are taking a fresh look at the condition of the IPO market, whether an IPO makes sense for all kinds of growth companies, and viable “exit strategy” alternatives.

Do you need to be a Cisco or a Google, or would becoming the target of a Yahoo do? So you’ve got this technology and...

Latham & Watkins partner Faye Russell says outside of biotechs, profitability is a key in deciding whether a company should consider going public. (photo/Kat Woronowicz)

First, it’s still important to know where you stand in the IPO derby if for no other reason than to negotiate leverage with prospective suitors. “You need to think in terms of what industry you’re in,” says Faye Russell, partner at Latham & Watkins. “In the life sciences, it’s not as important to be profitable. You can get an IPO without profitability.” Investors, though, are looking for your biotech to have a drug candidate in clinical trials, preferably Phase III or close to being commercially viable.

Outside the life sciences, the market is saying “Show Me the Money.” Russell’s firm handled the IPOs for Provide Commerce Corp. (proflowers.com) and is handling an upcoming IPO for websidestory, a holdover from the Internet era that provides metrics for Web sites. Latham & Watkins also handled the IPO for Santarus Inc., a pharmaceutical company that went public in the second quarter and placed second in Hoover’s Top Ten Best Returning IPOs in the second quarter. Santarus went out at $9, and closed at $14.75, which is about all the “pop” a de novo IPO company should expect post-Internet “bubble.”

“I don’t think we’re ever going to see the level of activity like in the go-go years,” Russell says. “There were companies that shouldn’t have been there and you really don’t see that anymore.” Post Sarbanes-Oxley reporting and certification requirements, the atmosphere is more sober now because “it’s front and center every time (the management) signs one of those certifications,” Russell says.

The inventor of technology has to make a decision sometime after product development about “letting go” by inviting in venture capitalists, who will not only demand a piece of the action, but will want to assemble a corporate team with CEO, CFO, and marketers, all of whom preferably have already been there and done that.

“At some point in the exit scenario, you’re going to have to deal with ‘external influences,’” says Jason Kent, an associate at Cooley Godward. Kent worked on the IPO for San Diego’s Metabasis, a biotech with three products in clinical trials, including drugs for diabetes, hepatitis B and liver cancer.

Going the IPO route means the founder may become “director of technology development,” while a new management team positions the company for Wall Street. The other major exit strategy is merger and/or acquisition (M&A), says Kent. That route also presents the external influence of revealing the company’s business to the suitor, if not the government, and the additional burden of integrating the businesses, eliminating redundancies and worrying about its management.

Cash Remains King

Eddie Rodriguez. principal of Fish & Richardson, lays out the advantages of the merger and/or acquisition strategy. (photo/alandeckerphoto.com)

Another way of “letting go” is to invent something, build the company to where it’s an attractive target, sell it and move on to the next project, says Fish & Richardson principal Eddie Rodriguez.

“M&A has a lot of advantages,” Rodriguez says. “It allows you to exit faster; it may not be the same amount of money, but you cash out, do your own thing and form a new company. There’s more financial freedom quicker, without the headaches of a public company.” As evidence, Rodriguez points to more than 5,000 company sales this year.

“Back in the go-go days, the Ciscos had stock valued at outrageous prices. It was all about deals and big stock options,” Rodriguez says. “Today cash, not stock, is king, and people are leery of stock options. Technology is a lot cheaper so you can buy tech supplies and components rather cheaply, form a company pretty quickly without going for the big VC dollars. Microsoft has bought 40 companies in the last few years. Most are ‘tiny deals’ — $5 million, $10 million, $20 million.”

This is the mini-me of Microsoft, Cisco or Yahoo. Find a niche in a hot segment (e-mail security, spam filters, anything that can be done on a cell phone), build a company, get a few sizable customers, sell it, take the money, and do it again.

The market enthusiasm for IPOs has waned because of economic uncertainties, says Adam Lenain, senior counsel with Foley & Lardner. (photo/alandeckerphoto.com)

Sarbanes-Oxley and the SEC regulations trailing in its wake have made the IPO less attractive, Rodriguez says. “Do I want to be the CEO and pick up the paper and read about all the guys in Peregrine — do I really want a piece of this? Do I want to raise $20 million from VCs for years or do I want to raise a little bit, sell it for $20 million and get a bigger piece of the pie?”

Fish & Richardson client Vocel Inc. has partnered with Verizon to figure out how students can take SAT review courses on their cell phones. The idea is not to reinvent the wheel, but take an existing technology, look under its hood, fix what’s wrong with it, or find a way to improve it.

“Every company has server problems,” Rodriguez says. “They’re crashing all the time. If you can come up with a solution to that...”

A shortcut to the IPO is a “reverse merger” into a “public shell,” typically a public company that doesn’t do much of what originally made it a publicly traded concern. Lenain says this financing vehicle is increasingly frowned upon by the SEC and rules have been proposed that will tighten up disclosure requirements.

For public companies that don’t want to go through a secondary or follow-on offering, there’s a PIPE or private investment in a public entity. Lenain says he helped Alliance Pharmaceuticals raise about $11 million from private sources for development of its lead drug Oxygent. But this alternative is generally reserved for sophisticated investors and public companies seeking a limited amount of money for a specific purpose.

David Young, a Gray Cary partner, says the expectation on IPOs today is 15 percent to 20 percent above the asking price. (photo/alandeckerphoto.com)

Money On The Table

Should your baby be delivered on Wall Street, don’t fret if it doesn’t command multiples like before, says Gray Cary partner David Young, who worked on IPOs for Geocities and San Diego-based JNI, among others.

“These days, the expectation on the IPO is 15 percent to 20 percent above the asking price,” Young says. “Multiples were the historical anomaly. Companies wanted the publicity, but left money on the table. If you think about it, the company would rather have a higher asking price and a lower ‘pop.’ The company that has the biggest runup should be upset about that: why didn’t we get the money? So now that’s normalized a bit. You want to have a spread (between the asking price and the high). You don’t want to leave money on the table. The company wants the higher asking price, the underwriters want to build the cushion.”