More Firms Seeking to Return to Market Sooner After IPO
A growing number of companies making initial public stock offerings are coming back to the market just months later for fresh cash.
The trend in part reflects the competitive reality of the Internet sector: To get that all-important name recognition, many Net-related firms must spend big chunks of money upfront for ad campaigns, sharply raising their cash “burn” rates.
As long as public demand for their stocks is high, selling new shares is the logical way to go, companies note. But for firms that are running low on cash, the risk is that the market could tumble and investors’ willingness to buy new stock in “secondary” offerings could evaporate.
Some analysts, however, say the majority of companies making secondary offerings soon after their IPOs are doing so for another reason: to allow major investors to cash out, which also can increase a stock’s liquidity by boosting the number of owners and the total shares outstanding.
A rise in the number of outstanding shares, while potentially “diluting” current holders’ stake in a firm, can make a stock more attractive to big investors because they like to trade shares in large blocks.
In any case, the trend of secondary offerings quickly following IPOs boomed in 1999.
“In the olden days--I’m talking four or five years ago--people wouldn’t go public if they thought they were going to need more money” soon after, said Bill Elkus, senior managing director with Idealab Capital Partners, a venture fund in Pasadena. “Now people go public knowing they will need more money--it’s just a question of when and how much.”
In 1999’s highflying market, 44 companies that went public also completed secondary offerings, a 193% increase from the 15 companies that did so the year before, according to CommScan, a New York-based investment banking research firm.
“Secondaries are part of the big plan now,” said Gail Bronson, a Silicon Valley investor and an analyst with IPO Monitor, a Calabasas-based data firm. “Especially with the technology firms, as bigger budgets are required for advertising, cash acquisitions [etc.] . . . all those competitive efforts require major cash expenditures.”
Well-known names such as Genentech Inc. (ticker symbol: DNA), a San Francisco biotech giant; Stamps.com (STMP), a Santa Monica online postage provider; and Juniper Networks (JNPR), a Mountain View, Calif., networking firm, all went public and did follow-on deals as well in 1999. Some of those secondary deals were double or triple the size of their IPOs.
Some companies’ need for capital has deepened with Madison Avenue’s decision to force many Net companies to pay cash upfront for ad campaigns.
Stamps.com, which went public in June at $11 a share, raising $55 million, was back in the market in December. In its follow-on deal it raised $350 million to pay for a national TV ad campaign and to meet marketing agreements with America Online and Microsoft.
At the time of the secondary, SEC filings showed the company had only about $20 million in cash on its balance sheet.
“Cash is king with advertisers. They want it early and often and upfront,” said John LaValle, chief financial officer for Stamps.com. “We thought, ‘When you’re at the well, take as big a drink as you can because you don’t know when you’re going to be there again.’ Clearly without the secondary, we would not be doing the advertising to the extent we are now.”
Still, since its Dec. 7 secondary, Stamps.com stock has been on a severe slide, falling from $76 then to $33.31 now. During the November “roadshow” promoting the offering, the stock rose as high as $90.
“We’re baffled by it,” LaValle said of the decline, insofar as the deal strengthened the company’s competitive position.
Advertising firms defend their cash-payment demands, noting the high expected mortality rate of many Net-related companies.
“You’ve got to distinguish between the ‘dot-coms’ and the ‘dot-cons,’ ” said David Suissa of Suissa Miller, a Los Angeles ad agency that has developed campaigns for Egreetings, the San Francisco Internet firm, and Edmunds.com, a Los Angeles car information provider. “You have to protect yourself, and cash upfront is one way to do that.”
Internet companies and other newly public firms needing more capital have three major choices: a secondary stock offering; a private equity sale to investors; or a debt offering or bank loan.
Companies that have seen their shares climb after an IPO naturally find secondaries can make the most sense because much of the sales groundwork has already been done with the IPO.
For that same reason, venture capitalists and corporate insiders looking to cash out of part or all of their stakes in new companies often do so via secondary offerings.
Those early investors and company insiders generally are prohibited from selling their stakes in an IPO until the “lockup period” expires, typically six months after an offering.
“A follow-on [offering] solves the dilemma of providing liquidity to insiders in an orderly market,” said Todd Jadwin, managing director with Banc of America Securities in Los Angeles.
As long as the public still is very interested in new companies, investment bankers say many tech companies need only one full quarter as a public firm before returning to the market with new stock.
In 1999, firms completed same-year secondaries an average of 157 days after their IPOs, compared with 184 days in 1998 and 199 days in 1997, CommScan found.
One that came back quickly was Juniper Networks, which went public in June, raising $163 million. Juniper’s stock surged 190% on its first trading day.
By September, Juniper was back in the market, raising $950 million in a secondary stock offering.
Unlike some companies, Juniper hadn’t planned on a secondary at the time of its IPO, according to Chief Financial Officer Marcell Gani. However, the firm wanted to allow some early corporate investors, such as Lucent Technologies, to cash out.
“After the IPO, we found some of those early corporate investors’ interests weren’t aligned with our interests,” as they were selling the company’s stock in small chunks to take a profit, Gani said. “We wanted to get our shares in the hands of people who believed in the long-term health of our company.”
Lucent and other investors sold 3.5 million shares in the secondary offering. Juniper itself offered 1.5 million shares. The announcement of the deal initially depressed the stock price, but it has rocketed since, from $190 on the day of the offering to $340.13 now.
Still, most companies that made IPOs last year haven’t yet come back to the market.
Tut Systems Inc. (TUTS), a Pleasant Hill, Calif., provider of high-speed data access, has found no need to do a secondary. Although the company is unprofitable, cash-related expenses as a percentage of revenue have declined in recent quarters.
Tut, which went public Jan. 28, 1999, raised $45 million in its IPO; its stock is up 164% since then.
“We had sufficient capital from the IPO, and going back to the market is a significant chunk of management time,” said CFO Nelson Caldwell, noting one of the drawbacks of follow-ons. But he quickly added: “Of course, we could be back in the capital markets if the need arises.”
Along with the companies and early investors, investment banking firms are, of course, big beneficiaries of the rise in secondary offerings. Such firms typically get a 7% fee on IPOs and an additional 3% to 6% fee for secondaries, often bringing the combined fees for two offerings to more than $10 million.
Times wire services were used in compiling this report. Debora Vrana can be reached at debora.vrana@latimes.com.
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Stepping Up Secondaries
A growing number of companies that went public during 1999 also raised money through a secondary, or “follow-on,” stock sale in the same year, according to CommScan, an investment banking research firm in New York. Some analysts say such firms may be spending their cash at a quicker “burn rate” than ever before.
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Source: CommScan
