IPOs make a cautious, quiet return

FRAMINGHAM (11/07/2003) - Private network companies in search of capital might begin looking to IPOs again, as signs point to the return of this financing vehicle that hasn't been in favor since the Internet bubble burst in 2000.

Experts cite a number of factors for the return of the term IPO to the vocabulary of network industry entrepreneurs, venture capitalists and institutional investors. Among those are a stabilizing economy, increased IT spending, strong financial performance of some key public companies in the technology industry and a few solid stock offerings over the past few months.

However, today's IPO is more sober than the high-flying offerings of just three years ago. Experts say now a company must have a shipping product with an impressive customer list and show consecutive quarters of profits before investors will welcome their shares on the public market. They say the IPO window will not open for everyone; only companies in hot product areas such as semiconductors, wireless networks and e-mail security, where IT spending is particularly concentrated, are likely to pull off a successful offering.

"It's clear investors are interested in growth stories again, and that's good news for technology companies," says Joe Muscat, a partner with Ernst & Young's emerging and growth markets practice. "But there's no question that investors are more rigorous today. Companies that are most successful act like public companies well before the initial offering."

With the return of the IPO and the capital it raises comes hopes for greater research and development spending and, theoretically, higher-quality products. "Funding and IPOs allow the companies with the good ideas to expand more rapidly - more development, more sales and marketing - similar to the growth in companies we saw in the early to mid-1990s," says Doug Carlisle, managing partner with venture capital firm Menlo Ventures.

In addition, with the stringent, government-imposed financial reporting rules now placed on public companies to remedy recent corporate accounting scandals, start-ups must have their back offices in order before even thinking of going public. This means companies that go public today are more likely to survive - unlike many of the less-mature start-ups that went public during the dot-com craze, then suddenly vanished. And this will instill greater confidence in IT departments looking to standardize on their products.

Of the companies with recent public offerings that have begun to rebuild investor confidence (see graphic), small office/home office (SOHO) network equipment maker Netgear has become a sort of poster child for the new-age IPO. The company issued stock in July at US$14 per share and raised $113 million, which it will use to pay back a loan to Nortel, fund research and development and expand its sales channel, says Patrick Lo, Netgear Inc.'s chairman and CEO.

As a public company, Netgear now has the capital and the high profile to compete with other companies in this segment, most of which are also public. "Now that we're public, we've leveled the playing field," Lo says.

Since its IPO, Netgear's shares have traded above $20 and haven't dipped below offering price. The company's offering was successful because it is well-positioned in an exploding market, says Samuel Wilson, a senior analyst who tracks the company for JMP Securities.

"Netgear is in a high-growth market - networking in the home - at a time when broadband penetration is going up," Wilson says. "Other companies should take heart to know that the old playbook is back in effect; Netgear was profitable, had healthy revenues and no customer concentration issues."

More IPOs to come?

These recent success stories, plus the perceived improvement in the economy, have inspired more companies to consider IPOs. Search site Google is rumored to be planning an offering for later this year or early next, which will no doubt create significant buzz and inspire other companies to do the same, says Jeffrey Hirschkorn, senior IPO analyst with "Google is a bellwether company," he says.

Other companies said to be considering public offerings include SOHO equipment maker 2Wire, networking software developer Motive Communications Inc., travel Web site Orbitz LLC and quality-of-service appliance maker Allot Communications Ltd.

However, this IPO buzz is tempered by realistic statements from entrepreneurs demonstrating they've learned lessons from the crop of CEOs whose companies flew high and fell hard during the Internet boom.

"My focus for the next six months is . . . looking forward to high growth and having a profitable year and then planning accordingly," says Scott Weiss, CEO of e-mail security appliance maker IronPort Systems Inc. "An IPO is simply an offspring of a large, successful company."

Another financing event that's experiencing a recent resurgence in the technology industry is the acquisition. Last week alone, Novell Inc.'s acquisition of SuSE Linux AG and Network Appliance Inc.'s buyout of Spinnaker Networks Inc. totaled more than $500 million.

Some say start-ups - particularly in the network market - are more likely to be acquired than go public. "I'm not saying there aren't opportunities to go public," says Pascal Luck, managing director with venture firm Core Capital. "I just think that for every 10 companies that get bought, one will go public."