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EXIT STRATEGIES

Businesses Say No to IPOs

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Mike Canney had a lot of options in front of him. As owner and founder of defense contracting firm Intelligence Data Systems, he was an entrepreneur that in a shade over seven years had nurtured his idea for a company into a booming business, doing more than $40-million worth of contracting with the government a year. But Canney had reached a junction. He wanted to move on to something else -- the seven-year itch he calls it. He had an offer on the table to sell -- from Titan corp., one of the giants in the contracting space. Actually, he had seven offers. Throw into the mix the always prominent and tempting IPO and Canney had some crucial choices to make.

"I had to consider what was best for my employees, our product and the company in general," he recalled. "And I had to keep in mind what I wanted, too. This was a tough decision."

And it appears to be getting tougher for entrepreneurs like Canney. Five short years ago, an IPO was the end of an entrepreneurial journey -- the big payoff after years of bootstrapping, working for no pay, scratching to make payroll and dealing with lurking competition. But today, the IPO teeters on being an option many entrepreneurs view as a hassle, Jeffrey Kuhn, co-founder and managing principal at San Mateo based Financial Leadership Group, a company that helps prep companies IPO, said. Kuhn adds that because of a grumpy market, finicky and educated investors, and acquisition-hungry companies on the prowl, an IPO should be mulled carefully and may not be the best option for companies that might have been a lock 36 months ago.

"Going public is like going to the Hotel California," Kuhn said. "You can check out anytime you like, but you can never leave. Business owners and venture capitalists are thinking hard about this decision and weighing the benefits versus the drawbacks because you only get one chance - and now doesn't seem like the right time for a lot of companies."

A study released recently by the National Venture Capital Association gives traction to Kuhn's analysis. According to the study, fewer companies are going public -- especially venture-backed companies.

The study shows that 48 companies went public in the second quarter of 2005, up five from the first quarter but down 10 from the same time a year ago. However, IPOs for venture-backed companies have significantly dropped off in the first half of 2005. As of the end of June, 20 venture-backed companies went public at the half-way point for the year, far below the 51 from the first two quarters a year ago, and far behind the pace set last year that ended with almost 100 venture-backed IPOs.

Tom Kinnear, the executive director of the Zell-Lurie Institute at the University of Michigan, points to one simple reason why IPOs are down: cost.

"The up-front cost of getting a company ready for an IPO has soared over the past five years," Kinnear said. "And the main culprit of this are the Sarbanes-Oxley regulations."

Since it's inception three years ago, Sarbanes-Oxley has become a huge hindrance to both companies on the fringe of an IPO and those who have been trading for decades. But Kinnear sees a bright spot to the speed bump caused by the red tape of SOX.

"Overall, the market is good now. The amateurs aren't there anymore. There are no more pipe-dream IPOs. Sarbanes-Oxley has ratcheted up the cost and complication of going public, so only those companies that are really ready, go public. In the long run, that will lead to more success and a stronger market."

Generally, an IPO-ready company is a profitable company with anywhere between $40 to $60 million in revenue, according to Kinner, a huge increase from a few years ago where "a company could go public with $20 million or so in revenue," Kinnear added.

Companies sporting such success are now being tempted by other cash-happy venues and are seeing options like big corporations looking for healthy additions, late venture funding and private placements as viable alternatives to going public. Acquisitions, in particular, increasingly have become tempting, and recent data from VentureOne supports this. In the first quarter of 2005, the typical price of an acquisition was $24.4 million -- almost 150% more than it was just five years ago.

"There's much more cash available when a company goes public," Kuhn said. "But getting acquired could be a great strategic move and could mean a stronger company in the long run, and more and more venture funds and business owners are realizing this."

With all of these options in front of them, successful business owners have many options to consider. In Canney's case, he took the simple approach: He listened to his instincts and took the offer from Titan to the tune of $42 million.

"This wasn't even the highest offer," Canney said. "But my employees benefited from the sale and overall it was the best option."

Canney, now an employee of Titan Corp., is still tasked with the same responsibilities and duties as he was as CEO of IDS, minus a few. "I'm very content and sleep a lot more now, "a payoff almost any entrepreneur would appreciate.

Last updated: Jul 14, 2005




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