Alabama doesn't automatically come to mind as a hotbed of business innovation. Nor does Nevada, unless you're talking about new ways to...
Alabama doesn’t automatically come to mind as a hotbed of business innovation. Nor does Nevada, unless you’re talking about new ways to separate gamblers from their money.
But so far this year, both Alabama and Nevada have spawned more publicly traded companies than has Washington state — three initial public offerings (IPOs) apiece, compared with just two IPOs from Washington companies.
In fact, 2005 has been a markedly sparse year for Pacific Northwest IPOs. Although the total number of new issues on U.S. markets is running close to last year’s pace, only three Northwest companies have managed to go public. Even hurricane-ravaged Louisiana managed four.
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Market watchers point to several factors behind the dearth of Northwest IPOs:
• Risk-averse investors have shied away from the high-tech startups that are the Northwest’s specialty, gravitating instead to insurers, energy companies and other old-line businesses.
• It’s more expensive to be publicly traded, especially for smaller, younger companies, due to corporate-governance reforms such as the 2002 Sarbanes-Oxley Act.
• Alternate sources of capital, including cash-rich private-equity firms and large corporations, can pump money into a young company or give its founders an easy way to cash out. Insiders at Seattle-based WhitePages.com, for example, recently sold stock to a couple of private-equity firms for $31.7 million; Internet service provider United Online bought Renton-based Classmates last year for $100 million in cash.
“For a small, young, growing company, the amount of time and personnel and expense is so great that a lot of them are saying, ‘I don’t want to be a public company, I want to be bought by a public company,” said Chad Waite, general partner of OVP Venture Partners in Kirkland.
Indeed, the kinds of companies venture capitalists tend to invest in — cutting-edge technology or biotech startups — have lost favor this year among IPO investors.
Look more broadly, though, and the overall IPO market seems reasonably healthy — especially compared to the bust years of 2001-03.
Through the end of November, Seattle Times research shows, 196 companies have sold shares onto major U.S. markets for the first time, including foreign companies and mutual banks converting to stock ownership. At the same point last year, 217 companies had gone public, en route to 250 for the full year.
Last year, nine companies in Washington, Oregon and Idaho successfully completed IPOs — more than in 2001, 2002 and 2003 combined. Several of the new public companies — online marketer Marchex, online jeweler Blue Nile, online real-estate firm HouseValues — were redolent of the headiest days of the tech boom.
This year’s crop of new stocks, however, has been decidedly more old-school. SeaBright Insurance has provided workers’ compensation coverage to the maritime industry and other niche markets for nearly 20 years; MWI Veterinary Supply, based in Meridian, Idaho, distributes drugs, vaccines, pet food and other animal-health products across the country, and goes back nearly three decades. Even Zumiez, an Everett-based retailer that caters to skateboard-riding teens, is itself 26 years old.
Nationally, telecommunications stocks have been one of the few bright spots for technology IPOs, while Internet, software and biotech offerings are harder sells.
“The market is struggling with tech,” said Doug Gonsalves, managing director of Palo Alto, Calif.-based investment bank SVB Alliant.
By contrast, industrial stocks make up 17.9 percent of this year’s IPO crop, compared with 12 percent last year. Oil and gas companies, basic materials producers and transport companies all are significantly more popular.
Kathy Smith, a principal at Greenwich, Conn.-based Renaissance Capital, said IPO investors, still feeling burned by the collapse of the tech bubble and skittish about the broader market, are seeking safer harbors — companies that have been around awhile and have proven business models.
“If investors are nervous about the overall stock market, they’ll be even more nervous about IPOs,” said Smith, whose firm specializes in IPO research and manages an IPO mutual fund. “The market’s been in a repair mode since 2000.”
Much of the investor cash that would have gone into IPOs five or six years ago instead has flowed to hedge funds and private-equity firms. Those firms, along with big corporations with cash-laden balance sheets, increasingly have positioned themselves as alternatives to going public — buying stakes in young, growing companies or purchasing them outright.
According to VentureOne and Ernst & Young, at the height of the tech boom in 1999 almost as many venture-backed companies went public (45 percent) as merged or were acquired (55 percent). Through the third quarter of this year, only 10 percent of so-called “liquidity events” for venture-backed companies were IPOs; 90 percent were mergers or acquisitions.
One of those acquisitions was Seattle-based NexCura, a online provider of targeted medical information. Last month, an arm of information giant Thomson bought NexCura for an undisclosed sum.
Peter Hoover, NexCura’s chief executive before the sale, said the company is growing and about to turn its first profit. Had it been at that stage five or six years ago, he said, it “absolutely” would have considered an IPO.
But the bar is much higher now for health-care IPOs, Hoover said — “you’re not seeing those nova-type companies going out right away and getting huge valuations.” Moreover, NexCura needed both cash and a bigger partner to fully develop its business.
In the boom days, a company like NexCura might have gone public to create a valuable, liquid stock it could use as currency for deals. As it was, said Hoover, now NexCura’s executive vice president under Thomson, “our choice was between refinancing the company and finding a strategic investor who’d put more than cash in.”
With valuations a lot lower now than during the boom, and regulatory burdens a lot higher, he added, “small companies are really nervous about the idea of going public on their own.”
Although an IPO may no longer be the ultimate goal for every Northwest startup, few expect the local IPO market to be quiet forever.
SVB Alliant’s Gonsalves, for one, said that when the IPO window opens wider for technology startups, there will be plenty of local companies ready to waltz through.
“I’m spending a lot of time up in Seattle and Portland, and there are a lot of interesting young companies coming out of there,” he said. “The Northwest is again feeling its oats.”
Drew DeSilver: 206-464-3145 or firstname.lastname@example.org