How To Drive Suitors -- And Investors -- Wild
Going public isn't what it used to be. The Sarbanes-Oxley Act of 2002 makes the process more expensive and time-consuming. Insiders can't unload stock after the offering without attracting intense scrutiny. And Wall Street analysts aren't as cuddly with chief executives as they once were. So, with all the hassles, do some of the companies filing to launch initial public offerings these days have ulterior motives?
Increasingly, private companies are pursuing an IPO and an outright sale at the same time. This parallel-track approach is gaining popularity as going public gets tougher and the market for acquisitions strengthens. While no company will admit that it filed to go public merely as a ploy to get a better price in a private sale, some execs concede that their IPO filing helped them attract a suitor and do just that. In the first six months of this year, eight companies that registered to go public were bought privately instead, up from two in the first half of last year, according to Thomson Financial (TOC ).
The pace seems to be picking up. In June alone, three companies were snatched out of the IPO pipeline: Time Warner's (TWX ) America Online unit said it will buy Advertising.com for $435 million, restaurant chain Bob Evans Farms (BOBE ) scooped up Mimi's Café for $182 million, and business-development firm Allied Capital (ALD ) announced it will purchase equipment-lease provider Financial Pacific for $94 million. What's more, at least three companies that were planning to file for IPOs this year were claimed by buyers first: online shopping service Kelkoo, wireless content-provider Jamba!, and telecom-equipment maker Telica.
The climate has certainly changed from the late '90s. Back then, if a company had a prayer of going public, it almost never sold out. "[That] was much less attractive then because you were going public at such high [price-earnings] multiples," says Raymond J. Lane, a partner at Menlo Park, Calif., venture-capital firm Kleiner Perkins Caufield & Byers. Traditionally, bankers have appraised a company for sale at 20% to 50% less than its IPO value because shares can be sold much more easily than entire companies.
But now, as some companies use a potential IPO as a bargaining chip in acquisition talks, that discount is disappearing. A big reason is that buyers -- both companies looking to expand and investment firms -- are flush with cash and are willing to spend it as the economy motors ahead. In July, buyout firm Apollo Management LP bought Borden Chemical Inc. two months after its IPO filing for $1.2 billion. At the same time, companies that have sat on the sidelines of the merger market are rejoining the fray. In May, former telecom high-flyer Lucent Technologies Inc. (LU ) said it will buy Telica for $295 million in stock and options -- the company's first acquisition in three years. "What's notable about many of these recent deals is that these companies are being acquired at the full value they would trade at after an IPO," says Tor Braham, co-head of tech mergers and acquisitions banking at Deutsche Bank Securities.
That's making acquisition offers very tempting for execs. A raft of companies recently have had to cut their IPO prices before going to market. So it's hard to turn down a generous cash offer when the alternative is to rely on a whimsical stock market. And after an IPO, execs may not be able to sell all their shares for up to seven years; some other investors may be locked in for two years. A seller might say, "I can take $450 million off the table in cash, or I can cross my fingers and hope the IPO does well," says Tom Taulli, principal at Bridgewater Capital, a Newport Beach, Calif., investment bank.
Advertising.com decided not to cross its fingers, but "there's no doubt" that the company's impending flotation on NASDAQ gave it leverage with AOL, says Chairman and Chief Executive Scott A. Ferber. He says AOL came back no less than three times after it first approached his company. "We said, 'That's fine, but we're still going public unless you make a definitive offer.' We were marching down both paths simultaneously." AOL says Advertising.com's IPO plans were a call to action. "We realized that if we wanted to do something, this was our opportunity," says Jonathan F. Miller, AOL's CEO. As AOL might say, "You've got leverage."
By Justin Hibbard in San Mateo, Calif.