Austin Business Journal
August 20, 2004
Deciding between IPO, merger takes research
Jennifer LeClaire It's your brain child. Your baby. Your blood, sweat and tears -- it's your business. You've labored, toiled and invested hard-earned money to grow your startup into a competitive corporation. Now you've decided it's time to cash in on your efforts. That decision leaves you with two options: go public or sell the farm. What's an entrepreneur to do? Investigate the market, choose a path and then jump in head first. "Planning an exit strategy is very important," says Larry Schumann, managing director with Corporate Investment, an Austin-based business brokerage. "Founders and investors want to know what they are working toward. Whether you go public or sell the business, there are steps you should take to prepare the company for liquidity." Going public The merger and acquisitions madness and initial public offering fever that characterized the late 1990s has quieted dramatically, but these markets are coming back -- and there is plenty of data to prove it. In the second quarter of this year, 24 venture-backed U.S. companies completed IPOs that raised $1.3 billion, according to VentureOne, a provider of finance and investment data. That's the most in a single quarter since 2000. "Health care companies clearly see a receptive public market," says John Gabbert, VentureOne's vice president of worldwide research. "Two-thirds of the IPOs that occurred this quarter were in the health care category, and more than half, 13 of them, were within the biopharmaceutical segment." Another 48 venture-backed companies are registered to go public, Gabbert says, indicating the increased pace of public offerings may continue throughout the year. Austin's Motive Inc., a provider of management software, went public on June 25 and raised $50 million on its first day of trade. Staktek Holdings Inc., an Austin-based memory module maker, raised $102 million in February. Shooting for M&A However, merging with a company or letting another company acquire your business are the most favorable options for middle-market firms, some experts say. "The allure of an IPO is very different than the M&A process," says Peter Falvey, cofounder of Revolution Partners, a Boston-based investment bank. "But despite the few highprofile public offerings we've seen in the marketplace, a merger or acquisition is still the exit
of choice for most middle-market technology companies." With a continued focus on regulatory changes under the Sarbanes-Oxley Act and the growing emphasis on director's and officer's insurance, experts say mergers and acquisitions can be less of a headache for entrepreneurs in any industry. Perhaps that's why the number of venture-backed company mergers and acquisitions held steady with the robust level of activity reported in the first quarter, according to VentureOne. Eighty-eight companies were merged or acquired for a total of $5.5 billion paid, with information technology companies leading the way. VentureOne research showed the median amount paid for mergers and acquisitions in the first and second quarters was about $49 million. Almost two-thirds of mergers and acquisitions in the second quarter were in the IT sector, with the total amount paid reaching $3.4 billion. Software companies had the most deals, followed by communications firms. Seventeen health care companies completed deals worth $1.3 billion. Once you, as a business owner, feel comfortable with the financial landscape, you need to determine whether going public or selling is the best exit strategy. Mike McAllister, an investment banker with CN Group in Austin, says decisive factors include business growth, market share growth, and the company's ability to achieve capitalization that is sizeable enough to justify an IPO. "In today's market, IPOs are more appropriate for companies that have a market value of at least $100 million," McAllister says. "There are a lot of good companies that would love to achieve liquidity but cannot achieve that threshold of market value. So their best alternative in the short term is to sell to a buyer." Sellers can enlist a broker or research the buyer's market on their own. The buyers can be public or private companies looking to purchase a business that will fill in a product line or sales channel, or a private equity buyer. In either case, buyers seek companies that have their finances in order and can demonstrate a track record for auditable growth and future earnings potential. "Marketing your company for sale is not much different from the initiatives that attract venture capitalists," says Richard Rafferty, a partner in the Austin office of law firm Haynes and Boone LLP. "You need to understand who are the players in your space and what opportunity your product or service represents." Even with sterling financial statements and an undeniable competitive advantage, the actual selling process is wrought with pitfalls. There can be compensation issues tied to future performance goals that delay cashing in, or heavy stock considerations that put you at the mercy of the public markets. But perhaps the biggest pitfall is the health of the business itself during the process of IPO or merger. Either scenario requires that company leaders focus plenty of attention on the transaction. Without the proper support staff, the sales figures could suffer at the exact moment when your business needs to demonstrate stable growth.
"There are financial services companies that can help assist in the operations of the company or in the development of different types of financial statements that a buyer may want to see," says Mike Dunn, a partner with the law firm Gray Cary Ware & Freidenrich LLP in Austin. "The idea is to thicken the ranks so you can continue operations while also pursuing a strategic transaction." Experts say sellers often overestimate the value of their companies. Owners can determine a realistic value by comparing financial performance with similar companies in the industry. "The greatest driver of value is multiple bidders at the table," says Charles Welch, managing director of Alliant Partners Corp., a division of California-based Silicon Valley Bank. "If you have created market share, demonstrate attractive financial performance and profitability, a strong customer base and sales channel partners and excellent management, then you are in a good position to get the best value for your company."