As a Managing Director in Newport Partners’ corporate wealth practice, John Garrow focuses on the corporate finance needs of the firm’s entrepreneurial clients. These activities typically include capital raising (both equity and debt), business sales and acquisitions and advisory work. His client base includes organizations across a diverse spectrum of growth stages and industries and includes both private and public companies.
Prior to joining Newport Partners, John spent 11 years with RBC Capital Markets. His responsibilities included acting as co-head of the financial institutions group, several years in the firm’s Calgary office and positions in the debt markets and financial products groups.
John qualified as a Chartered Accountant with Price Waterhouse and, over his six years with that firm, audited several of Canada’s largest private and public companies in a variety of industries with his final year in the consulting practice.
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The New York Times Small Business section is usually a worthwhile read.
Today's piece by Jay Goltz, entrepreneur and small business columnist, on what he views to be the Top 10 Reasons for Entrepreneurial Success is especially good and, I thought, worth sharing.
With the apparent resurgence in the IPO market, it seemed timely to revisit my last blog What to know before you IPO and ask, “what’s changed?”
After doing a little digging, it seemed to me there are several points worth making, which haven’t really been front and centre in the popular press. Namely:
First, the facts: Presumably you’ve read about the hot IPO markets, with successes like the $200mm offering of RealD (riders of the 3D wave and makers of those clunky glasses you use to watch these movies), Smart Technologies ($660 mm - makers of “whiteboards”) and MEG Energy ($675mm – an oil sands producer). Even Skype, the internet phone service, owned by a consortium including our very own CPP, has filed today to access the markets.
The number of IPOs to date in the US (the world’s most active market) is 81 for the first six months of 2010 vs. 18 for the same period a year ago. This is 4.5X higher, and above the entire amount for 2009.
However, if you look at 2010’s performance over a longer time frame, the volumes are still historically low. Have a look at the website of Renaissance Capital, which provides a convenient source for IPO data and trends.
What is the reason for this flurry of activity? Particularly against a backdrop of an uncertain economic environment?
Well, first of all, according to some market observers, profits don’t matter. As David Milstead of the Globe & Mail wrote last week, Forget profits, it’s all about revenues.
This applies to existing companies, i.e. whether or not Apple beat the “Street” estimate for revenues, without regard to EBITDA (earnings before interest taxes depreciation and amortization), or that number you hardly ever see in research reports – net income. It also applies, especially, to new companies. In fact of the three high profile IPOs noted above, only one (Smart Technologies) has a positive EBITDA.
Against a backdrop of the market’s focus on revenues vs. profits, the valuation levels being applied to these revenues is also expanding. An example of this is the pricing outlined in an IPO for Intralinks today. The pricing was 4.6X expected revenues (or rather the most recent quarter’s revenues, annualized) for a company that had accumulated net losses of $65mm+ in the three years that it had been owned by its private equity buyers.
Perhaps the graph below can explain some of the interest in issuers accessing the IPO market. This is for a peer group of “Software as a Service” or “On Demand” software companies. That is, those companies that provide their software product over the internet, rather than as a shrink-wrapped disk sold to their customers.
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Valuation vs. revenue multiples are up 43% over the past 12 months, whereas valuation vs. EBITDA multiples are only up 5% - making it an ideal time for these types of issuers to access the markets – and a time for investors to be cautious.
Last weekend, I finished reading Rod McQueen's “BlackBerry: The Inside Story of Research in Motion” and thoroughly enjoyed it. It got me thinking about one area devoted relatively little space in the book – the entrepreneur’s decision to go public.
Now, in 300 pages recounting the 25 year history of perhaps Canada’s most successful technology company, you may figure 20 pages is sufficient to devote to the issue of going public. For the record, Research In Motion (RIM) completed a private placement of $34 million to institutional investors in June 1996 (12 years after Mike Lazaridis had started the company) and then completed a full blown IPO in October 1997.
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