Why it could be wise to go public and why a royalty-based investment can make sense

‘Ask Mal’

Editor’s note: Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected], and your inquiry could be the inspiration for his next column.

Q: What are some of the reasons to take a company public? What may be some of the drawbacks?

A: There are three primary reasons to consider going public. The first reason is if you need money, most often to grow your company. When I was considering taking Invacare Corporation public, I checked with several venture capital firms. I compared their offers with the option of going public, and in almost all cases, the venture capital firms wanted twice the percentage of the company that I would give up by going public.

Second, going public will make a liquidity event for your original investors. They have no other way of getting out of their investment unless the entire company is sold, and a market recapitalization is out of the question. When a company goes public, shareholders can then sell their interests or keep them.

The third reason is that for a family owned business, being public gives liquidity opportunities without having to sell the whole company. It means if I wanted to sell some shares, I could do it.

As for the drawbacks, one of the principal ones is cost. You have to pay the dues for the New York Stock Exchange, comply with the Sarbanes-Oxley Act, you have to pay a public board of directors — that all adds up to cost.

Another drawback is that your financial information becomes public. You have to report a lot of information. But from the viewpoint of competing, you should never chase a competitor — you should chase your customers. If you take care of your customers in a superior way, you will beat your competitors. If you just chase competitors, by the time you catch up with them, they will have moved on.

Other considerations include how much time you want to spend wooing Wall Street. A lot of CEOs focus on the Street instead of running the company. I gave three or four talks a year, but I wasn’t obsessed with visiting Wall Street that much, and I had a person who works for me that covered most of that work.

Q: What is your advice on royalty-based investment models?

A: I built a great company that way. I was trying to buy a startup company that had a home health care bed, and I knew the product line fit very well with Invacare. I didn’t have a lot of money but I was able to convince the company owners they really had a good bed. I offered to pay them royalties. It was a win-win for both of us. I would make a profit, they would get their royalties.

We agreed upon a figure and once I paid that amount, it was the end of my commitment. So be sure to have either a specific amount, in my case $3 million, or a length of time, in your agreement.

A lot of people have inventions and instead of trying to start a company from scratch and go through all those problems, they can sell the product to a bigger company for royalties. There’s no cost; it’s all profit.

Mal Mixon is the former chairman of Invacare Corporation. A complete story of his Mal Mixon’s rise from rags to riches is told in his book An American Journey, published by Smart Business. It can be found at www.anamericanjourneybook.com and on Amazon.com.

US IPO market boasts more than 90 effective IPOs in Q2

The U.S. IPO market continued to flourish in Q2, with 91 IPOs both effective and projected, turning in the strongest quarter over the last decade and the third consecutive quarter where more than 70 IPOs went effective.

According to EY’s U.S. IPO Pipeline Analysis, 91 IPOs have gone effective in Q2, raising about $23.1 billion in proceeds; 47 percent more than the 62 IPOs from the same quarter a year ago and more than 20 over last quarter. Proceeds raised this quarter have surpassed last quarter’s $11.9 billion and $14.8 billion in the same quarter a year ago.

“New IPOs continue to fuel a strong pipeline this quarter as capital is readily available,” says Jackie Kelley, EY’s global IPO leader. “PE and VCs are driving IPOs as they seize the opportunity to realize value for investors, confidence continues to build as the VIX® is now at the lowest level since the start of 2007, and with M&A hot again, companies have more options to exit. Dual tracking has become popular again.”

Q2 Review:

It was another hot quarter for health care and technology — with both rising to the top as the most active industries due to favorable market conditions for VC/PE exits.

In the first half of 2014, almost three out of four health care and technology IPOs were either PE- or VC-backed — that is, 45 out of 63 health care IPOs and 24 out of 32 technology IPOs.

Rounding out the top five sectors are the oil and gas, financial services and retail industries. In terms of proceeds, technology and oil and gas raised the most capital among all industries.

Drivers:

Technology companies over the last five years have been streamlining operations, developing cash positive business models and throwing off cash. Debt markets have been friendly and innovation around the cloud, and mobile is driving a lot of activity.

The health care and life sciences industries have exploded recently with companies looking to become more specialized, thus narrowing their areas of focus — a trend expected to continue for the foreseeable future.

In financial services, smaller regional financial institutions and insurance companies found opportunities to raise capital. Oil and gas IPOs continue to be driven by limited partnerships.

A further breakdown of the 87 IPOs currently in the pipeline by sector:

  •  34 are in health care, raising $1.9 billion.
  • 18 are in financial services, raising $0.7 billion.
  • 8 are in technology, raising $0.8 billion.
  • 4 are in oil and gas, raising $2.1 billion.
  • 4 are in professional services, raising $1.1 billion.
  • 4 are in utilities, raising $1.3 billion.

Cross-border is back:

U.S. exchanges continue to be the most attractive in the world and have dominated the market with 91 IPOs and $23.1 billion in proceeds. The proceeds were twice more than the second busiest exchange of London.

Valuation was less favorable compared to the first quarter as investors exhibited signs of caution on whether or not the uptrend in the equity markets is sustainable. Only three U.S. domiciled companies listed outside of the U.S. for the first half of 2014 including Margaritaville in Jamaica; Acucela Inc. in Japan and e-TeleQuote in the U.K.

“This quarter saw a comeback of cross border listings reaching their highest level since 2007,” Kelley says. “Ten Greater Chinese firms listed on U.S. exchanges, raising more than $3.5 billion compared to only one in the first quarter. Eight of the 11, or 73 percent, of companies listing on U.S. exchanges are technology or Internet-based companies.”

The China Securities Regulatory Commission recently announced it would limit IPOs in China to about 100 in the second half of the year, which could encourage even more of the 700 Chinese firms in the IPO pipeline to consider a cross border listing.

Other countries listing on U.S. exchanges in 1H 2014:

  • U.K. five deals, $2.7 billion.
  • Israel three deals, $200 million.
  • Canada three deals, $400 million.

VC and PE-backed IPOs

PE and VC account for 60 percent of US IPOs with 54 deals and $18.3 billion in proceeds.

The two top PE-backed IPOs were Ally Financial and IMS Health. VC-backed IPO volume dropped in the second quarter compared to Q1. Proceeds of $4.8 billion surpassed both Q1 and the second quarter of 2013.

Forty-one of the IPOs in today’s 87-company pipeline are PE/VC-backed, which is more typical of historical trends. The market will continue to see PE/VC exits in the foreseeable future.

nat_ey_PipelineChart

*Q2 2014 figures are as of June 17, 2014. Number of IPOs that went public is projection for the quarter.

“We’re expecting the IPO market to remain hot as new IPOs continue to fuel the pipeline,” Kelley says. “As the Federal Reserve has focused on keeping rates low and the tapering strategy will remain unchanged, barring any impact from geopolitical shock, we expect this to be a banner year reaching levels we have not seen since 2004.”

Animal health business Zoetis files IPO registration statement

NEW YORK, Mon Aug. 13, 2012 – Pfizer today announced that its subsidiary Zoetis Inc.  filed a registration statement with the U.S. Securities and Exchange Commission for a potential initial public offering of Class A common stock.

The offering is expected to represent an ownership stake of up to 20 percent. Prior to completion of the offering, which is targeted for the first half of 2013, Pfizer will transfer its animal health business to Zoetis.

The number of shares to be offered and the price range for the offering have not yet been determined.

Chrysler CEO reiterates no IPO in 2012

DETROIT, Tue Jul 31, 2012 – Chrysler Group LLC Chief Executive Sergio Marchionne said on Tuesday, as he has previously, that an initial public offering of company stock will not occur this year.
“This is not a 2012 event,” Marchionne said on a conference call on Chrysler’s second quarter earnings. Marchionne is also chief executive of Chrysler’s majority owner Fiat SpA.
“We obviously have ongoing discussion with VEBA” about a possible IPO for Chrysler in 2013, Marchionne said.
Fiat owns 58.5 percent of Chrysler and VEBA, the healthcare trust for Chrysler retirees run by the United Auto Workers union, owns the remaining shares.
Marchionne in early July announced the intention for Fiat to exercise a call option to increase its share in Chrysler by 3.3 percentage points to 61.8 percent.

SEC may order Nasdaq to upgrade trading systems: WSJ

NEW YORK, Fri Jun 29, 2012 – U.S. securities regulators may force Nasdaq OMX Group Inc. to upgrade its trading systems following last month’s glitch-ridden IPO of Facebook Inc., the Wall Street Journal reported.

The Securities and Exchange Commission is looking into what caused the glitches that left the market makers – who facilitate trades for brokers – in the dark for hours as to which trades had gone through.

As part of the deepening investigation, regulators are weighing whether to demand Nasdaq to revamp its processes for developing, changing, testing and implementing the computer code used in initial public offerings and other exchange functions, the newspaper said, citing people familiar with the matter.

The SEC hasn’t decided yet whether to take any enforcement action against Nasdaq, the paper said.

The news comes more than six weeks after Facebook’s $16 billion initial public offering on May 18, where technology glitches and a communication breakdown marred the trading of the stock.

The exchange’s executives are also reviewing its management structure, focusing on the operations and technology areas overseen by Anna Ewing, the Journal said, citing people familiar with discussions inside Nasdaq.

Ewing could not be reached for comment outside regular U.S. business hours.

Nasdaq’s board first discussed potential ways to restructure its operations and technology unit, including possibly replacing Ewing as the supervisor over both areas, more than four weeks ago, the newspaper said, citing one person with direct knowledge of the discussions.

Neither the SEC nor the Nasdaq could be immediately reached for comment.

Morgan Stanley faces Facebook fallout, limits damage

NEW YORK, Wed Jun 27, 2012 – Morgan Stanley was quick to dismiss suggestions its status as the king of initial public offerings for Silicon Valley was under threat because of the botched Facebook Inc. IPO last month. And that confidence may be warranted.

While Morgan Stanley has been snubbed by some technology companies, the repercussions for the Wall Street investment bank have been limited, according to sources familiar with the situation.

Just a week after the Facebook debut, Ruckus Wireless chose Goldman Sachs Group Inc. over Morgan Stanley as the lead underwriter for its IPO, sources familiar with the matter said.

One of the sources said the company’s decision had nothing to do with the social networking website’s debacle, but a second said Facebook had at least some influence on the decision.

Ruckus, which supplies WiFi products to mobile operators, chose Goldman primarily because it liked the firm’s banker and the pitch, the sources said. Morgan Stanley is now one of the bookrunners on the IPO.

Some companies and rivals have railed against Morgan Stanley’s tendency to monopolize IPOs – a practice that is not uncommon on Wall Street. The bank retained tight control over information, decisions and the allocation of Facebook shares, even though there were 33 bookrunners on the offering, other underwriters have said.

In fact, the bank has long argued it is right to do so, telling clients it offers them “one throat to choke” if something goes wrong, sources familiar with the situation said.

But at least one client, Palo Alto Networks, which has hired Morgan Stanley as its lead bookrunner, is no longer buying into that argument. The security software maker has asked its other underwriters, which include Goldman and Citigroup Inc., to be more active in its IPO, which is planned for later this summer, sources familiar with the company said. That will likely mean having more of a voice in book-building, as well as pricing discussions.

Morgan Stanley faces Facebook fallout, limits damage

NEW YORK, Wed Jun 27, 2012 – Morgan Stanley was quick to dismiss suggestions its status as the king of initial public offerings for Silicon Valley was under threat because of the botched Facebook Inc. IPO last month. And that confidence may be warranted.

While Morgan Stanley has been snubbed by some technology companies, the repercussions for the Wall Street investment bank have been limited, according to sources familiar with the situation.

Just a week after the Facebook debut, Ruckus Wireless chose Goldman Sachs Group Inc. over Morgan Stanley as the lead underwriter for its IPO, sources familiar with the matter said.

One of the sources said the company’s decision had nothing to do with the social networking website’s debacle, but a second said Facebook had at least some influence on the decision.

Ruckus, which supplies WiFi products to mobile operators, chose Goldman primarily because it liked the firm’s banker and the pitch, the sources said. Morgan Stanley is now one of the bookrunners on the IPO.

Some companies and rivals have railed against Morgan Stanley’s tendency to monopolize IPOs – a practice that is not uncommon on Wall Street. The bank retained tight control over information, decisions and the allocation of Facebook shares, even though there were 33 bookrunners on the offering, other underwriters have said.

In fact, the bank has long argued it is right to do so, telling clients it offers them “one throat to choke” if something goes wrong, sources familiar with the situation said.

But at least one client, Palo Alto Networks, which has hired Morgan Stanley as its lead bookrunner, is no longer buying into that argument. The security software maker has asked its other underwriters, which include Goldman and Citigroup Inc., to be more active in its IPO, which is planned for later this summer, sources familiar with the company said. That will likely mean having more of a voice in book-building, as well as pricing discussions.

Business software IPOs hope to trump market woes

NEW YORK, Fri Jun 8, 2012 – Data analysis software company Tableau Software and developer tools maker Atlassian are among several small, business software firms preparing to go public in the next 12 months, hoping a growing market for cloud computing will shield them from the aftermath of Facebook’s botched IPO and Europe’s woes.

Sources familiar with the situation said others include: AppSense, whose user virtualization technology allows people to use different devices; Marin Software, which offers an online advertising management platform; Rapid7, which makes network security software; Rally Software, a provider of project management tools; and CollabNet, which offers web-based software development tools.

These business software companies join other tech firms that are also looking to go public. Cloud-based phone systems provider RingCentral is close to picking bankers, sources familiar with the situation said. Ruckus Wireless, which supplies Wi-Fi products to mobile operators, has chosen Morgan Stanley and Goldman Sachs as its lead underwriters, the sources said.

All the seven business software companies offer products for the software as a service, or SaaS, market, in which software and associated data are hosted on remote servers, or the cloud. This segment of the market has been increasing in popularity because it is viewed as less costly and easier to implement than traditional hosting methods.

Tech behemoths including Oracle Corp, SAP AG and IBM Corp have spent billions to buy such companies in the past two years. The overall market for enterprise software grew 9.5 percent to $267 billion in 2011 and is expected to top $288 billion this year, according to Gartner.

That means these companies may form one bright spot in an otherwise moribund market for initial public offerings. U.S. IPOs, excluding Facebook, are down 53 percent this year, according to Thomson Reuters data. Facebook’s IPO last month further added to the chill as market problems at debut and the subsequent fall in its share price burned scores of investors.

How the new JOBS Act can help emerging companies go public

Dale Jensen, Partner-in-Charge, SEC Practice Group, Weaver

Making the decision to become a publicly traded company is not easy for any company. The process can be cumbersome and expensive, and it’s not a decision that a private company makes lightly.

However, the Jumpstart Our Business Startups (JOBS) Act — signed into law by President Barack Obama on April 5 — may make that decision easier for companies that meet the definition of an emerging growth company (EGC). The law is designed to increase American job creation and economic growth by improving access to capital markets for companies.

“The premise of the act is to somewhat reduce the financial and regulatory burden of going public and to provide EGCs with avenues of communication that did not exist under the prior rules for the process of becoming a public company,” says Dale Jensen, partner-in-charge of the SEC practice group at Weaver.

Smart Business spoke with Jensen about what companies can expect from the newly signed JOBS Act and how it can help them on their journey to going public.

What are EGCs and how will the JOBS Act impact them in their quest to go public?

As defined by the act, an EGC is one that has less than $1 billion in total annual gross revenue. The act redefines the rules around accessing capital in the public markets for those companies defined as an EGC. The intent is to give them some advantages by reducing the burdens that, in the past, they had to overcome when going public.

Also, with additional changes in communications with the Securities and Exchange Commission (SEC) and certain allowable communications with qualified potential investors before filing documents, companies can better understand whether becoming public is the right choice for them.

What advantages does the JOBS Act bring to EGCs?

First, an EGC may submit a confidential draft registration statement with the SEC before going public to get feedback and work through initial comments on a confidential basis. Because the law is so new, the SEC continues to come out with additional guidance and clarification about the process.

Another advantage is that an EGC will only be required to have two years of audited financial statements, rather than the three years previously required.

Along those lines, the JOBS Act also delays the requirement for EGCs to have an auditor’s attestation to report on internal controls for up to five years, potentially. In addition, for the implementation of new or revised financial reporting standards, EGCs will be exempt until the time when such standards are required to be implemented by private companies.

Finally, there are other reporting exemptions for EGCs, such as permitting smaller reporting, scaled disclosures for executive compensation, which means significantly reduced reporting and disclosure requirements.

Will the creation of the JOBS Act lead to an increase in the number of publicly traded companies?

Possibly. The reduced burden and the new allowable communications with potential investors (qualified institutional buyers and institutional accredited investors) should enable more EGCs to become publicly traded companies. That said, the process to go public remains the same, but the reduced disclosure requirements and adjustments in the communication process with the SEC and investors should simplify the process and make it less cumbersome for companies that want to pursue that option.

However, with the increase in the number of shareholders a private company may have before it will be required to file with the SEC (increased from 500 to 2,000), there may also be increased opportunity for companies to remain private and raise additional capital. This could also provide an avenue for public companies that are currently below this threshold to exit the public markets.

What challenges of becoming a publicly traded company are not addressed by the JOBS Act?

An EGC needs to understand that even though there is a reduced cost burden of going public, it is still an expensive process. And, once the company has gone public, there is an increase in the cost and oversight related to being public.

Companies also need to consider whether going public is really the right decision for them. Just because the JOBS Act simplifies the process, does not mean that companies should move forward. Companies should consider the following questions: Do you have the organizational structure in place? Do you have the right personnel? Do you have the ability to do the necessary reporting? Are you organizationally ‘publicly fit?’

Finally, make sure you have the right partners in place — aligning with the right accounting and advisory firm and the right legal counsel is critical to a successful entrance into the public markets.

Dale Jensen, CPA, CFE, is the partner-in-charge of the SEC practice group at Weaver. Reach him at [email protected]

Insights Accounting is brought to you by Weaver

Facebook market makers’ losses total at least $100 million

NEW YORK, Fri May 25, 2012 – Claims by four of Wall Street’s main market makers against Nasdaq over Facebook’s botched IPO are likely to exceed $100 million, as they and other traders continue to deal with thousands of problems with customer orders.

A technical glitch delayed the social networking company’s market debut by 30 minutes on Friday and many client orders were delayed, giving some investors and traders significant losses as the stock price dropped. The exchange operator is facing lawsuits from investors and threats of legal action from brokers.

Four of the top market makers in the Facebook IPO – Knight Capital, Citadel Securities, UBS AG and Citi’s Automated Trading Desk – collectively have probably lost more than $100 million from problems arising from the deal, said a senior executive at one of the firms.

Knight and Citadel are each claiming losses of $30 million to $35 million, potentially overwhelming a $13 million fund the exchange set up to deal with potential claims.

Nasdaq also has to contend with the outside prospect that it could lose the Facebook listing entirely after having just obtained it.