Private Matters

IPOs move further out of reach

Whatever happened to the IPO? For most entrepreneurs, the initial public offering used to be the ultimate sign of success. For many, it still is. But a soft stock market and the increased costs of being public are forcing more entrepreneurs to think at least twice before going that route.

The IPO market burst with the tech bubble in 2000 and has yet to recover. In the first nine months of 2004, 176 companies went public, compared with 86 the previous year, according to Thomson Financial. That sounds good, but 37% of those went to market at a lower price than originally expected. And while more companies filed with the Securities & Exchange Commission to go public this year -- 277, the most since 2000 -- 27 have withdrawn or postponed their offerings. Lukewarm investor response is one reason: The average IPO is down 1.2% from its offering price, according to Thomson.

The Size Factor. For the smallest contenders, the picture is even bleaker. Cutbacks on Wall Street mean fewer analysts are covering small-company stocks. Investors are far more wary of untested companies than they were just a few years ago, so smaller ones have simply been priced out of the IPO market. A decade ago, the median market cap of a company going public was $52 million. It was $227 million in the first eight months of 2004, according to KeyBanc Capital Markets in Cleveland. "The era of truly early-development-stage companies going public is over," says Wade Massad, managing director at KeyBanc. "It would be very difficult to give a small company the advice it would be to its advantage to tap the public markets today."

There are exceptions, of course, particularly in sought-after sectors such as technology, oil, and manufacturing. PowerDsine, a 125-employee company based in Hod Hasharon, Israel, and Farmingdale, N.Y., that makes equipment to help send data over power cables, made the leap to the public markets in June. While its 2003 revenues of $25.1 million were on the low side for an IPO, PowerDsine's 53% revenue growth and $20 million in venture capital let it raise $55 million in its IPO. "We have a much stronger balance sheet because we've raised this money," says CEO Igal Rotem. The IPO "was an important milestone that gives our customers a higher level of comfort in doing business with us."

Meanwhile, being a public company is becoming increasingly expensive. The 2002 Sarbanes-Oxley Act hit public companies with new regulations, driving up compliance costs. Jason Spievak, chief financial officer of Santa Barbara (Calif.)-based CallWave, a software company that went public in September, says the regulatory costs gave him pause. The annual premium on CallWave's directors and officers insurance will jump to $680,000 from $75,000, while audit and legal fees will increase to $300,000 from $180,000. Add compensation for new directors, investor relations services, printing and copying, and errors and omissions insurance, and the company will probably spend $1.5 million to $2 million a year just to be public. It will need to bring in an extra $6 million in annual sales to cover those costs. Suddenly, staying private doesn't look so bad.

By Jeremy Quittner

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