The IPO: a means for survival in the new economy
By Kevin Ferguson / Las Vegas Business Press / April 3, 2000
What once was a measure to raise capital to expand business operations, the initial public offering, or IPO, is now being considered a means to survive in the so-called new economy, executives of many tech companies say.
A company's IPO - when a stock is launched on a securities market such as Nasdaq - is becoming such a status symbol it's often celebrated by "launch parties" for company employees and significant clients where the group gathers to sip champagne and pray for a continuous bull run.
But in the months leading up to the IPO, company executives are not only fine-tuning the brand or service that will make the public stand and take notice. They're also strategizing on how to conquer new niche markets.
Las Vegas-based PurchasePro.com has been establishing alliances with corporate giants almost on a biweekly basis, since going public on the Nasdaq composite index last September. Its initial price was $12 a share, from which it raised $56 million.
The biggest deal for the business-to-business e-commerce company to date is its recent pack with America Online, which links PurchasePro's 20,000 clients with AOL's 22 million customers. (However, on March 20, the day of the AOL deal, PurchasePro's stock actually dropped $22.50 per share in value, closing at $129.25. Its decline continued: it closed at $89 on Thursday, down nearly $6 for the day.)
"Our goal is to be the nationwide yellow pages of the Internet," said Geoff Layne, executive vice president and co-founder of PurchasePro. "We're trying to connect all vertical market makers through our infrastructure."
Layne describes Internet companies that provide a service - such as AOL and its Internet connection, or Travelscape.com and its discounted travel packages - as market makers. Businesses that provide the e-marketplace for their services to be bought, sold, bid, or negotiated for, Layne calls "infrastructure providers."
AOL, as an Internet Service Provider, dwarfs the competition. Its closest competitor, Earthlink, has less than one-eighth of AOL's client base.
When travel wholesaler Expedia spun off of Microsoft and went public on the Nasdaq as its own entity last November, acquisitions and strategic alliances were not far behind. Within a few months, Expedia shelled out nearly $200 million to buy Las Vegas-based Travelscape, and Seattle-based VacationSpot.com, and signed an agreement with Ziff-Davis Publishing, one of the world's largest tech publishers, to collaborate on a travel magazine.
Shortly after announcing the deal with Travelscape, Expedia's chief executive Richard Barton, 32, told the Business Press that the company's goal is to create "the world's largest travel superstore."
"Lodging is the next big industry on the Web. This puts us in the pole position," said Barton.
If these IPOs grab the public, it allows these companies a lot of financial maneuvering.
"There's a lot of capital that needs to be raised to expand, and once a company goes public, it allows them to make acquisitions," said Mike Fearnow, owner of Focus Tech Investments, a Texas-based company that operates GoPublic.com.
But since the explosion of dot-com mania and stratospheric IPOs, these public offerings as status symbols are becoming a way to gain enormous media attention almost equal to a Super Bowl TV commercial.
"To a great extent that's true. It's the stamp of approval for the institutional company," Layne said. "If the stock doesn't go up, then institutional companies are saying they don't believe in the business model."
With a number of companies vying for a piece of a market niche, timing can be enormously significant whether a company wins or loses.
"Everybody is trying to be quick (with an IPO) on the market so they can stay ahead of the curve, because this industry moves very fast," Fearnow said. "And (an IPO) helps get your product or service visible on the market. Brand awareness is very important in the industry."
But quite often, an IPO can be stalled either because the company doesn't fill out its submission to the Securities and Exchange Commission completely, or the SEC could be struggling with a backlog of IPO orders.
Fearnow said once the documents are filed with the SEC, it normally takes 60 to 90 days to hit the market.
However, Las Vegas-based Lowestfare.com, which is owned by New York financier Carl Icahn, has been waiting for more than a year to go public since its submittal.
During the period prior to a company's IPO, company representatives are required to comply with a "quiet period," when they are forbidden to make comments to the news media that might affect the price of the stock.
A company's IPO is set by a committee of underwriters after they have measured the interest by institutional investors. They don't want to set the level to high because if the public doesn't buy into it for that reason, it makes you wonder if they believe in your business plan, Layne of PurchasePro said. But if they set it too low, the underwriters and the company can lose money.
And with the tempo of tech stocks today, public perception is that if an IPO doesn't double the first day, it's not a viable company. But that's not realistic, Fearnow said.
"If a stock maintains it's premium and rises about 10 to 15 percent for an ongoing period of time and the company continues to grow, that's more important," he said.
Choosing an stock index
When PurchasePro decided to go public, it chose the Nasdaq, because "that's where everybody wants to be these days," Layne said. The Nasdaq lately has become to symbolize the "new economy," with most of the thriving tech stocks, while the New York Stock Exchange has been dubbed the "old economy," with companies like Ford Motor Co., Shell Oil, and Chevron.
But some small companies looking for a springboard into the big leagues sometimes choose being listed on the Over The Counter - Bulletin Board. Ted Campbell, president and chief executive of Las Vegas-based GoPublicCentral.com describes the OTC-BB as Class A minor league baseball compared to the Nasdaq and NYSE as the major leagues.
"OTC-BB is for small micro cap companies," Campbell said. "They go public first then raise the money to develop their product."
GoPublicCentral.com helps small companies go public on the OTC-BB by assisting them develop a business plan, file with the state, and launch what's called a Direct Public Offering.
One Las Vegas-based tech company that is hoping the OTC-BB will launch them into the big leagues is Preference Technologies. The company was founded in 1998 as Stockup.com, a company providing financial information on the Web, and went public in 1999 under the symbol SKUP. On the day of launching their first product called the Global Information Gateway in February, the company changed its name to Preference Technologies and the symbol became PFER.
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