Unprofitable companies turn to IPOs
Thu May 20, 7:20 AM ET
By Matt Krantz, USA TODAY
Four years after shoveling money into the IPO incinerator by betting on money-losing companies, are investors ready to do it again?
Unprofitable companies are scurrying to cash in on the revived craving for initial public offerings: Of 11 companies scheduled to go public the next two weeks, seven lost money last year and six bled red in the first quarter. Even more money-losers have filed IPO plans and hope to hit the market in a few months, including PlanetOut and yellow page publisher Dex Media.
This is a dramatic departure from the past three years when companies had to be mature, growing and - above all - profitable if they hoped to have a chance going public. Investors who were burned so badly in the late 1990s didn't want to be fooled twice.
Not anymore. "The bar was high," says Richard Peterson, chief market strategist at Thomson Financial. "Now, the bar is low."
Investors can partly blame the return of the money-losing IPO on Google-itis. The furor about the popular (and profitable) search engine's IPO is causing other companies to think they can cash in.
Most agree the IPO market is nowhere near the tizzy of 1999 when cash-bleeding companies such as now-defunct Pets.com seemed like a good idea. Still, many aspects have experts concerned, including:
•The race to get into the pipeline. Knowing that the IPO process can take three months, companies are all but tripping over themselves to get in while the demand is hot. In all, 186 companies are in line to go public, the most since 2000, says IPO tracker Dealogic.
"There hasn't been much of a window in three years," says Russ Landon, investment banking chief at Adams Harkness & Hill. "If there is a market, companies want to take advantage of it."
•Desire to get cheap capital. Now that the Federal Reserve (news - web sites) is threatening to boost short-term interest rates, issuing debt is a much less attractive way to raise cash. Even with the new rules under Sarbanes-Oxley corporate governance laws, the lower cost makes tapping the stock market a preferred way to raise money. That's not being missed by small firms that need the cash the most.
•Biotech resurgence. Many of the unprofitable firms lining up are from the biotech industry, looking to cash in on the strong performance of publicly traded biotech stocks. So far, investors have been willing to buy into many young biotech firms' promises to deliver big future rewards. "When there's an opportunity to get access to IPO markets, (biotechs) eagerly do that," says Joe Muscat, a partner at Ernst & Young. But Landon says there is a key difference from four years ago: "Companies are going public for the right reasons. It feels very different than 1999 and 2000."
