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In the Hands of the People
Is Your Company Ready to Go Public?

Your Office, © Jennifer Crump

Algorithmics, a fast-growing Toronto developer of risk management software, had a staff of 500, revenues of about $100 million and was ready to go public. In advance of its initial public offering (IPO), it had signed with an underwriter, filed a prospectus and its senior executives had just completed a 13-day road show pitching to 60 institutional accounts. Unfortunately, the market wasn't ready for Algorithmics. Tech stocks and IPO launches had dropped and company executives, consulting with underwriters, made the difficult decision to withdraw last June and wait for the right market conditions. They may have quite a long wait.

IPO activity in Canada is headed to its lowest mark in a decade, according to a survey by PricewaterhouseCoopers, Toronto. Comparing 2000 to 2001, the total number %; of launches in the first two quarters -Jan. 1 Ito June 30-fell 27 percent. The total value of these initial public offerings fell 65 per- .cent. Many of the IPOs that did launch this I year were actually spinoffs of spinoffs from large existing public corporations like Kraft and Magna. "For aIl intents and purposes," says Eric Slavens, IPO services leader for PricewaterhouseCoopers, "there is no current IPO market."

Does that mean businesses should shelve their plans to go public? Absolutely not, say some analysts. It may not be the best time to launch an IPO, especially because of global economic uncertainty as a result of the American-led and far-reaching war on terrorism. But it's an excellent time to prepare for one. Slavens advises clients who think they want to go public to be constantly pre- pared to do it. "The window of opportunity opens quickly and closes just as quickly,” Slavens says. Companies that, like Algorithmics, have everything ready to go will be able to take advantage of that window when it opens.

Preparing for an lPO launch is a complex process that can take anywhere from two to four years, Slavens says. Provincial security regulators in Canada and the federal Securities and Exchange Commission (SEC) in the United States require at least three years of audited financial statements before allowing a company to go public. And going public means just that plans an IPO as its exit strategy:

Underwriters and investors scrutinize every aspect of a company's business plan-the product, financial plans and marketing. They also look into the business backgrounds of everyone connected to the company; employees and members of the board. Nelson Smith, managing director and head of investment banking at Yorkton Securities, Toronto, has one piece of advice: "Start to behave like a public company even when you're not."

 BUSINESS MUST CONTINUE AS USUAL

ConjuChem Inc., a Montreal biotech company, staned acting like one of the big boys right after it opened its doors in 1997 with 13 employees. Like many biotech companies, says chief financial officer Lennie Ryer, ConjuChem intended to go public from the start. One of the first things management did was hire him to act as point man. "You can't allow an IPO to distract the scientific team or the management team," Ryer says, "and you don't cease all other activities with a company during an IPO launch.”

Making early contact with investment companies and institutional investors was one of the most important things ConjuChem did before going pub- the move to act like a public Ryer believes, since financial backing begets more financial backing. He met with these potential partners three or four times to talk about the company and its plans before he tried to sell them equity. "You have to seed the investment companies 365 days a year, "  Ryer says. "They never kiss on the first date."

ConjuChem's planning paid off. . Launching its IPO on the Toronto Stock Exchange (1SE) in November. 2000, the company raised over $28 million and has now grown to employ 55. A second offering last June enabled the company to take of the overhang ( early-stage investors wishing to sell their shares) and raise an additional $24 million. "We were determined to be proactive,” says Ryer who, hot on the heels of the second public offering, still met with major investors weekly.

A company has to be financially healthy before it can go public. "Otherwise you're perceived as desperate,  Ryer says. Like many public companies, ConjuChem first sought out the usual avenues for financial assistance, from seed money and venture capital.

Venture capitalists can pro-vide far more than money to a young company; says Claude Miron, vice- president of venture capital at the Business Development Bank of Canada, Montreal. "They bring guidance and experience to the entrepreneur and they are driven to succeed,' he says. They can also be counted on to bring a network of contacts to the company, which can really help in structuring the board of directors, finding top-Ievel people to complement the management team and helping open doors to customers. 'For public markets your board has to have a background in business and it helps to have a name Bay Street recognizes,' Smith adds. 'If you can get a Terry Matthews (of Newbridge  Networks fame) on board, Bay Street totally recognizes him and your firm becomes known. "

ATTORNEYS, CFOs & UNDERWRITERS

iMagic1V, Saint John, N.B., already had Terry Matthews on board, says Gerry Verner, vice-president of marketing and business development, so the company didn't need to build its profile. Instead, it concentrated efforts on hiring a CFO and adding accounting and operations staff to prepare for being a public company and dealing with the SEC. "We'd heard it was important not to underestimate the sheer amount of work involved, " Verner explains, “not only around the IPO, but also for reporting responsibilities once we were public."

In preparation, iMagicTV beefed up its existing legal team with attorneys who had been through the process before. “The prospectus is 30% details we wrote and 70% legal information our legal team wrote with some input from us,” Verner says. Experienced attorneys are critical. A company planning to launch on both sides of the border probably needs American attorneys as well as Canadian ones since the requirements of New York’s Nasdaq and the TSE are quite different. iMagicTV had planned to list only on the much larger Nasdaq, but the underwriters convinced the firm to list on the TSE as well to diversify the investor base.

With finances and personnel in place, the next step is to find an underwriter willing to carry the IPO. This is one of the stranger processes in business. Smith Refers to it as a beauty contest and says that smart companies interview the investment dealers at the same time as the investment dealers interview the company’s executives. Smith has received questionnaires several pages long from companies considering Yorkton, among others, as their underwriter.

iMagicTV’s pitch to the underwriters paid off and it attracted the interest of two of the bigger firms on Wall Street. “The bottom line her is that if you have a good story but are a small company in Canada – you have to work a little harder to the get the attention of the big underwriters,” Verner says. “But preparing your pitch pays off.”

That’s what Montreal animator Cinar did. “One of the things made Cinar great was that its senior management took the time to continually communicate with the street,” Smith says. “They might go to the Cannes Film Fesitval and drop into Geneva and tell their story to potential investors there.” Told often, that story was also told well. Find a good storyteller, preferably the CEO, someone with intimate knowledge of the company who can confidently tell its story with enthusiasm.

Make sure the story is good. There has to be a compelling hook – something that sets the company apart from its competitors. When ConjuChem launched its road show to sell investors on its IPO, the firm had only finished the first three phases of clinical testing, but some of what was coming down the pipeline had already become widely recognized as potential large-market products.

iMagicTV’s software enables telephone companies and other service providers to deliver digital television and interactive media to subscribers’ TVs and computers over a high speed network. “We were able to prove to investors that the technology works, that we had strategic investors lining up, that we had a lead over the competitors and that the market was about to take off,” Verner says.

 A good story and a great underwriter don’t guarantee success in the public market. In fact Algorithmics “Algo Research Quarterly,” suggests that within two years of launching, more than 50% of companies trade below their IPO price. Much of the failure has to do with timing: Either the market is flat or the company is simply not ready to go public. Or it could be hubris, Smith Says. Entrepreneurs are by definition independent and are often unwilling to listen to advisors. “But they need help with both premise and the promise in order to succeed,” he says.

Sometimes that means sitting back and waiting for the right time, as Algorithmics is doing. Smith says that two or three years ago, high-tech companies could go public with not much more than an idea written on the back of an envelope. Today, he says, there is virtually no market for IPOs. But that could change fast: the market is in a constant state of flux. “One thing I can guarantee about the IPO market,” says Slavens, “is that it will change.” And when it does companies like Algorithmics will be ready.

SIDEBAR - 4 Clues to a Strong IPO –

Venture capitalists and many private investors insist that a company have an exit strategy before they invest. These are relatively short-term investors so the company must have a strategy for additional financing when the private investors are ready to get out. Exit strategy also refers to an entrepreneur’s long-term plan to sell off or merge the business (it has to be long term or investors get jittery). Claude Miron, vice-president of venture capital at the Business Development Bank of Canada, Montreal, looks for four things in a company that plans an IPO as its exit strategy:

• Solid management: people driven by success, who have a partnership attitude and are willing to take advice
• First-rate hires: a solid team of employees
• Very large market opportunity: potential annual sales need to be at least US$500 million a year
• Sustainable competitive advantage: intellectual property that makes it difficult to replicate the product

SIDEBAR: Public Launch 101

What to do:

• Hire a CFO.
• Hire an investment relations’ professional.
• Create a strong, independent board of directors.
• Give the board real power with respect to investors, hiring, financial and marketing decisions, and so on. Once a company makes the move to act like a public company, management has to be willing to relinquish the total control it once had.
• Look for private investment from recognized venture capitalists and other investors.
• Have your financial statements audited.
• Court underwriter, fund managers and investment companies early and often (however, each IPO wannabe’s needs will be different).
• Prepare a great road show.
• Hire the best advisors and listen to them.

What not to do:

• Rely on your own instincts.
• Rush your IPO launch.
• Develop unrealistic expectations.
• Promise more than you can delive

SIDEBAR: Going Public, the PROs and Cons

The revenue benchmark a company needs to reach before going public, says Algorithmics’ David Paolini, is US$50 million. But the price, value and number of share in an initial public offering – and in the public offerings that follow – are negotiated through discussions between underwriters and company executives. There’s no set formula to determine these values, which are ofent affected by the company’s forecasted profits, as well as market conditions. In effect, these share offerings are a debt the company assumes, owed to the public who has bought their shares.

Going public offers a number of advantages to a growing company, says Eric Slavens of PricewaterhouseCoopers, but you need to be aware of the disadvantages.

Disadvantages:

• Costly
• Time consuming
• Loss of privacy and often, control
• Performance pressure
• Increased management accountability to others – not only can you no longer dictate what your company does, but you can also no longer do some of the things you could before your company went public.

Advantages

• It’s one of the best ways to attract capital, opening access to a greater range of sources of money from a wider investor base. Once you establish a track record with the investing public, and if the stock performs well, you can sell additional shares and raise more monies. You have increased liquidity, market value, you can usually get a higher price per share than you would offering a share in your company to private investors.
• It often increases market value.
• It can enable you to attract the best employees and board members because of stock sharing plans and the prestige of going public.
• Give you a strong currency for acquisitions and other financial transactions.
• Often provides improved credibility among suppliers and customers. When a company successfully goes public, investors, the public, suppliers and potential partners all know that it’s no longer just the owners who believe in this company. Investment firms and others who buy shares have demonstrated their belief as well. Also there’s the issue of regulations and safety measures that public companies must operate within. Regulators scrutinize the activities of public companies; they are perceived as more accountable for their actions and activities than private firms.

SIDEBAR: The Beauty Contest

Underwriters are the investment bankers who bring out new securities issue, agreeing to purchase and resell them. Often a lead underwriter and several other underwriters work together on a given issue. Questions to ask when trying to find the best underwriter:

·        What is your market share? (The bigger the market, the more potential investors it can reach, the better the company’s resources for research, etc.)

·        How many IPO issues have you been involved with – and how many have been completed? (The more IPOs, the greater the underwriter’s hands-on experience. The more successfully launched, the more likely it will be successful in the future. Ask about the underwriter’s latest 10 IPOs and get the names of CEOs to contact for references.)

·        How have you fared in the aftermarket? (Launching an IPO is one thing – excitement often propels the stock – but an underwriter also has to make sure the stock doesn’t crash and burn in the aftermarket.)

·        What sort of analyst/research support can my company expect from yours? ( Underwriters need to have resources at hand to make sure your stock hits the market at the right time and in a style that attracts positive interest from major investors).

·        What’s your reputation in the industry? (Choose the underwriter that’s right for your industry. Do your homework before you call any underwriters).

·        What is your national/international client base? (The wider your underwriter’s client base geographically, the more areas you can sell in. A broad target may or may not be for you. Find out where the underwriter would sell).

·        Are these clients primarily institutional investors or private? (Find out if your underwriter can do both).