The mania for initial public offerings of Internet-based companies is fading. Flush with venture capital, the new rite of passage for dot-coms are mergers and acquisitions.
At stake is a universe of thousands of Internet and high-tech oriented companies. A small proportion of that universe, over 300, were among the 546 companies that went public in 1999. In the coming year, most of the remaining dot-coms will likely shun a public offering.
"Their exit strategy is to sell to someone, diverge or develop an alliance," said Jeff Anderson, a principal at Washington D.C.-based consultancy Bond & Pecaro Inc. An early example this year was Expedia Inc. (Nasdaq: EXPE). The company, which had a public offering in September, announced its acquisition of Travelscape.com Inc. (The latter scrapped its IPO plans last summer.)
Changing Times
How times have changed. Venture capitalist enthusiasm for IPOs convinced many companies that Internet entrepreneurship virtually guaranteed the players a pot of gold. Last year's roster of IPOs gained a remarkable 188.16 percent over offering by the end of the year.
But the Web is possibly becoming a victim of its own success at delivering solutions. What's more, the market has quickly matured. Several prominent 1999 IPOs announced acquisitions earlier this year, Net Perceptions Inc. (Nasdaq: NETP), Red Hat Inc. (Nasdaq: RHAT), and Primus Knowledge Solutions Inc. (Nasdaq: PKSI) were among them.
"The first question that a venture capitalist will ask when looking at a management team is whether it has the fire in its belly, as well as the skills to go public," said Philippe Courtot, chairman and chief executive of Signio Inc.
Last December, Signio announced it would shelve its plans to conduct an IPO. It went instead for an acquisition offer from VeriSign Inc. (Nasdaq: VRSN). A pioneer in the development of Internet payment technology, Signio reckoned payment and authentication services, which is VeriSign's area of expertise, went hand-in-glove.
"When we started our mezzanine round of financing we approached VeriSign to see if they wanted to be an investor as well as a technical partner," Courtot explained. "We were 15 days from closing our mezzanine round. VeriSign said they would rather acquire us. There were customer synergies, application synergies and technical synergies."
Benefits of IPO
Building operations and gaining technical expertise are often motivations for an IPO. Many times these goals are more efficiently accomplished via an acquisition or merger. What's more, the IPO process often confounds business executives. That process demands management put daily operations on the backburner in order to satisfy the rigors of the roadshow.
"There are a lot of things that need to be considered," said David Parker, director of business development and investor relations for Primus, a July 1999 IPO. The Seattle-based developer of customer service software has completed a pair of acquisitions within the last 90 days.
Parker asked, "How much time is it going to take to do an IPO? What aspects of the business need to be built? What are the risks? Can I bet that market conditions will be the same?"
As someone who has seen it all, Signio's Courtot admits that the decision can be regrettable. After negotiating cc:Mail Inc.'s merger with Lotus Development Corp. in 1991, he joined Verity Inc. (Nasdaq: VRTY), remaining through its Oct. 6, 1995, IPO. Earlier this year he joined Signio. He cites his unsatisfactory negotiations with Lotus as the impetus for his cautious examination of VeriSign's proposition.
"If I had that to do over again," Courtot said, "I wouldn't. Lotus didn't take advantage of cc:Mail."
"They didn't do what they said they were going to do," he added. "That's why this time I have been careful to make sure there isn't a product conflict."
Overvaluation
Companies weighing acquisition offers in the current market must be vigilant against the market's tendency towards overvaluation. The most popular method of valuation today is the market approach. Many analysts ignore traditional techniques, including the income model, because they are predicated on a company's financial operations.
For those companies that managed to navigate the pipeline and have experienced the market's generosity, the merger marketplace has become akin to a duty-free shop.
"They certainly are benefiting because they are buying with their stock," Anderson said. "They don't have to put cash into these companies. And it hurts traditional companies because the market hasn't been as generous with them."of Traders Magazine
