Going public is a big deal. So is almost going public. Three Inc. 500 CEOs discuss how the lessons they learned from their aborted IPOs were almost as valuable as the money they would have raised.
Going public is a big deal. So is almost going public. Three companies that seemed ideally suited for IPOs didn't make it--for reasons none could have anticipated
Last year 102 Inc. 500 CEOs told us that they planned to take their companies public by the year 2000. As of this May only eight of the companies had reached that pinnacle. Granted, there's still time for a few more to squeak in under the wire. But we can only surmise that, in many cases, an overheated economy raised CEOs' expectations to an unreasonable high--even for the country's fastest-growing companies.
Any number of unpredictable events along the way can block a company's ambitions and disappoint its owners and backers. But the hardest jolt has to be when a company is right on the brink of going public--underwriter in place, registration papers filed with the Securities and Exchange Commission, road show scheduled or even under way, employees psyched--and then is forced to back off.
Here, then, are the stories of three such companies on this year's list. Unlike their headline-making brethren, these companies did not see their stock run up, flip, split, or otherwise make the founders, employees, and investors rich. Still, with lessons aplenty to learn from, their chief executives have taken a deep breath and are moving forward. The companies are all healthy. And the public markets are still on the horizon. The distant horizon perhaps, but still in view.
Company: Optiva Ranking: #2, 1996; #1, 1997; #81, 1998; #426, 1999 Cause of IPO death: The fatal distraction of an ongoing lawsuit Cost incurred: $500,000
Water has always played an important role at Optiva Corp. The company's best-selling Sonicare toothbrush (to date, its only product) relies on sound waves traveling through water to erode plaque. Water is also a symbol in company folklore; for many years Optiva's manufacturing plant was separated from the rest of the company's operations by a creek that periodically flooded over, making employees' treks back and forth, well, an adventure.
Water--in this case, liquidity--was very much on the mind of CEO David Giuliani by the time Optiva topped the Inc. 500 list in October 1997. There were longtime investors (who had poured nearly $500,000 into the company in 1990) to consider, but Optiva also needed more cash to properly roll out new products in the U.S. retail channel as well as overseas. Finally, in May 1998 the company filed its S-1 registration papers with plans for a summer initial public offering managed by Hambrecht & Quist and PaineWebber. The offering was expected to raise some $30 million for Optiva.
The prospectus warned the world of the usual risks inherent in investing in a one-product company whose rivals are larger and better-known. One of the risk factors not deemed material was the threat of a major lawsuit. But such a suit was exactly what Optiva faced not long after the ink dried on its S-1 papers. In the summer of 1998, Gillette announced it was suing Optiva for false-advertising claims made against its Braun unit.
The timing was curious. For years Optiva and Braun had each challenged the other's product claims, but always quietly, out of court. As the market stakes increased, the war of words in print advertising escalated to a level of surprising belligerence. (For example, Optiva ads that ran in national consumer magazines claimed that using the competing Braun product wouldn't prevent the growth of bacteria that might contribute to heart disease, stroke, low birth weight, and other life-threatening conditions.) "It wasn't a style of engagement that we started," says Giuliani, "but we certainly responded to it." Even so, the two companies had always hashed out their advertising complaints in hearings held before "judges" at the National Advertising Division of the Council of Better Business Bureaus. Optiva had won more times than it had lost.
Then came the lawsuit in June 1998. "It was," says Giuliani, "a surprise." And a deadly distraction. Optiva's small management team was suddenly diverted from preparing for the public markets to defending itself in a court of law. One of the first things Optiva did was eat its words. A letter went out to 220,000 dentists and hygienists retracting a key advertising claim that Sonicare reduces the worst kind of bacteria, a finding that was based on a scientific study that turned out to be wrong, Giuliani says.
The road show went on hold indefinitely as the suit dragged on for seven months. About a month before the verdict, Optiva quietly withdrew its S-1 registration. The timing, Giuliani insists, was merely coincidental. "Pulling the IPO paperwork was not a big event; it was simply a clerical cleanup."