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IPOs at the Crossroads

''In this day of Sarbanes-Oxley oversight and regulation, the cost of going public is $4 million, even for the smallest companies.''

21Oct

After a sharp uptick in filings early in the year, the IPO market slowed again this summer. The somewhat disappointing IPO for Google Inc., with the number of shares offered slashed and the price per share cut from $108­$135 to $85, captured the most attention. In Google's shadow, some offerings were withdrawn and others suffered pricing shortfalls.

Late-summer doldrums typically take a toll on IPO activity, as Wall Streeters take their vacations. This year, though, the remaining market-watchers were left to speculate about whether corporate filings in 2005 would resume the more active pace of the first half of 2004, when 228 companies filed for offerings, up from a mere 23 the year before. Also of interest: would IPO withdrawals taper off, reversing the trend in which many more deals were withdrawn after the midyear mark? (See "IPOs at the Crossroads," below.)

Of course, the added expense and delays associated with going public in the post-Enron regulatory environment have boosted the prospects for non-IPO capitalization for some time — leading more private companies to seek a buyer instead — so fewer entrepreneurs automatically tailor their business plans for an IPO exit strategy.

"In this day of Sarbanes-Oxley oversight and regulation, the cost of going public is $4 million, even for the smallest companies," says David Lavallee of boutique investment-banker Revolution Partners. He sees higher multiples, especially in the high-tech sector, suggesting that being acquired is becoming a more popular scenario for small private firms. Nonetheless, most experts expect some level of increase year-to-year in 2004 IPO activity.

As for whether Google might stimulate the IPO market after the summer slump, the experts are divided. Alexander D. Lynch, a New York-based partner at Weil, Gotshal & Manges LLP who specializes in IPOs, believes the Google "coattails are going to extend only to other search-related companies." Its use of multiple stock classes will be especially hard for other new public companies to repeat in this environment. "It won't work unless the star power of the deal is so great that classes don't matter to investors," he says.

But Graeme Howard, president of the Corporate Finance Institute Inc.'s IPO Vital Signs in Chestertown, Maryland, expects "a halo effect from the Google IPO" to help start an IPO resurgence right away. A full-fledged rebound will come after Inauguration Day, "as the new year's first IPO road shows reach their climax. I predict that 2005 will be a strong IPO market, with greater emphasis on economics and less investor mental shelf space allocated to domestic politics and Iraq," says Howard. "The smart CFO," he adds, "will be preparing now to file in February or March," drawing on their calendar-year financials. (For more, see CFO magazine's article "Maybe Next Year.")

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