• Why You Can Probably Forget About Going Public Any Time Soon

    saynotoiposYou may have noticed: The market has been hitting the skids as investors grow nervous over a broadening array of concerns from Ebola to expected interest rate hikes. In fact, as of the market’s close yesterday, U.S. stock indexes had fallen almost 10 percent since the beginning of last week — nearly enough to constitute an official correction.

    Things aren’t looking so great for recent tech issuers, either. Despite their highly celebrated IPOs, the shares of Yodlee, Wayfair, Hubspot and even Alibaba are down from their first day “pops,” and that “doesn’t work for IPO investors,” notes Kathleen Smith, a principal of Renaissance Capital, which manages an exchange-traded fund that tracks recent IPOs. “All these IPOs are not showing post first-day performance, which makes it hard for [other, still-private companies] to come out.”

    The IPO market is tied to the whims of the stock market, of course, but there are specific reasons that new tech stocks are sinking, says Smith. First and foremost, she says, the issue is linked to who, exactly, is acquiring new shares. “All this year, we’ve had a different set of buyers. It’s not the individual investors or small cap managers who, 10 years ago, might have talked up the stocks they were buying. They aren’t big commission generators for Wall Street, so it’s harder for them to get allocations,” she says.

    Smith thinks new issuers have been pricing their shares too richly, too. “It’s all about price discovery,” she says. “Public market investors aren’t tolerating excessive valuations. If companies think they come out at high valuations and watch their shares continue to rise, well, we’re not in that kind of market.”

    There’s also the so-called Alibaba effect to consider, notes John Fitzgibbon, founder of the research firm I.P.O. Scoop, which tracks IPOs. He compares the anticipation that surrounded the Chinese e-commerce giant’s September 19 IPO to what happened when both Facebook and Google went public, saying that in all three cases, public market investors have struggled with what next to get excited about. “The circus has left town,” says Fitzgibbon. “Alibaba was a one-day event. And now we’re back to the reality of the stock market, which is performing under the shadow of the [broader] stock market.”

    Fitzgibbon characterizes the market’s recent gyrations as a “healthy, sobering pullback.” Stocks are “bought on hype, held in greed and sold in fear. That’s your cycle,” he says, while declining to speculate about whether investors are likely to buy, hold, or continue to sell in the immediate future.

    Smith sounds more convinced that continued trouble lay ahead. “Private investors must be feeling nervous,” she says. “I know Box has talked about coming public. I see big companies in the pipeline. And a lot of them, I wonder about.”

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  • The Tech IPO Whisper Wars Heat Up

    chatterOn Friday, the Wall Street Journal reported that GoDaddy, which provides domain-name registration and Web hosting services to millions of customers, is “preparing for an initial public offering” and that in “coming weeks [GoDaddy] plans to interview banks” to underwrite its offering. The source was “people familiar with the matter.”

    For better or worse, such whisperings have now become the new normal, and we can expect to see much more of the same as a result of the JOBS Act and the changes it has brought to tech IPOs. (The JOBS Act permits companies to submit confidential draft registrations to the SEC and go public within 30 days of their acceptance.)

    Before the JOBS Act, filing an S-1 was much more public. Competitors knew a company was planning to go public, and any revisions by the SEC caused costly delays that could cause a company to miss its “window” to go public.

    GoDaddy was just one company that suffered through this process. In 2006, it tried to go public but later pulled its offering. Former CEO Bob Parsons, who was replaced as CEO in 2012, said at the time that he yanked the offering because he found the quiet period that came along with it “suffocating” as it prevented him for doing radio, TV, or his-then weekly Internet radio show. (The company was also losing money, according to its S-1.)

    Today, the JOBS Act gives companies much more flexibility in timing their offering, and leaking their supposed IPO plans has become a big part of the process.

    For now, the situation seems to be a win-win for everyone involved. Companies can test the public waters while simultaneously chumming for strategic acquirers, while reporters can feast on “scoops” that are hard to disprove.

    If there’s any downside, it’s that not going public after all can be, well, awkward, says Jay Ritter, a professor at the University of Florida who studies the I.P.O. market. “One of the reasons companies like confidential filings is that if they start the process, then pull back because the market isn’t as receptive to their business model as they thought, it can be embarrassing for a company, just as it might be embarrassing for someone who broadcasts that they’ve applied for a new job and gets turned down. People like to wait until the good outcome is about to occur before they announce things.”

    Conceivably, employee morale could take a hit, too, if staffers become convinced that an IPO is nearer than they thought based on press reports.

    But John Fitzgibbon, founder of the research firm IPO Scoop, says the advantages far outweigh any potential downside.

    “Before the Jobs Act,” says Fitzgibbon, “companies had to hang it out there and hope to God the market didn’t fall apart. But [the nearly two-year-old law] created market timing.”

    Now, says Fitzgibbon, “You prime the pump, get the guns lined up and, like Bunker Hill, you don’t fire until you see the whites of their eyes.”

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