IPO Reporter
Feb 7, 2000

Feature: M&A: Short-Sheeting The IPO Process.(Brief Article)
Author/s: Robert L. Whiddon

The IPO clearly became a rite of passage for Internet companies in 1999. But with thousands of high-technology companies stuffing their coffers with venture capital riches, and just 546 offerings last year, the fate that awaits the majority of the dot com and high-tech population lies in mergers and acquisitions. Just this week, Expedia Inc. (NNM:EXPE), flush from a Sept. 23, 1999, IPO, announced its acquisition of Travelscape.com Inc., which scrapped its own IPO plans last August.

"Last year there were probably 300 [Internet/high-tech] companies that went public, many without much history," said Jeff Anderson, a principal at Washington D.C.-based consultancy Bond & Pecaro Inc. "The universe numbers in the thousands, and only a few have gone public. The majority aren't going to go public; their exit strategy is to sell to someone or diverge or develop an alliance."

Venture capitalist enthusiasm for IPO activity convinced many companies that Internet entrepreneurship was a virtual rainbow with a pot of gold on either side. 1999's roster of IPOs climbed to an astounding 188.16% over offering by year's end. But the Web has fallen prey to its own invention, Internet-speed, and as such, the market has matured in a hurry. Several prominent 1999 IPOs, Net Perceptions Inc. (NNM:NETP), Red Hat Inc. (NNM:RHAT), and Primus Knowledge Solutions Inc. (NNM:PKSI) among them, have announced acquisitions in recent weeks.

"The first question that a venture capitalist will ask itself when looking at a management team is whether they have the fire in their belly and the skills needed to go public," commented Philippe Courtot, chairman and chief executive of Signio Inc. Last December, Signio announced it would forgo its own plans to conduct an initial public offering in favor of an acquisition offer from industry complement VeriSign Inc. (NNM:VRSN), which completed an IPO in January 1998. A pioneer in the development of Internet payment technology, Signio realized payment and authentication services, VeriSign's area of expertise, went hand-in-hand.

"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 said. "We were 15 days from closing our mezzanine round. . . and VeriSign said they would rather acquire us. There were customer synergies, application synergies and technical synergies. It was a no-brainer."

Building out operations, gaining technical expertise, and developing basic business operations are often the ostensible motivations for an initial public offering. But many times such goals are more efficiently accomplished via acquisition or merger. Furthermore, business executives are oftentimes confounded by the IPO process as it demands management put daily operations on the back-burner 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. "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 that has seen it all, 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. (NNM:VRTY), and remained through its Oct. 6, 1995, IPO, until earlier this year when 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, I wouldn't because Lotus didn't take advantage of cc:Mail. They didn't do what they said they were going to do," he said. "That's why this time I have been careful to make sure there isn't a product conflict."

In addition to product mismanagement, companies entertaining 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. But 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."