Last week Ernst & Young held their annual conference Journey 2011 at the Hilton hotel in sunny Tel Aviv, Israel. There were over 2000 participants and around 100 speakers from all over the world. Representatives from banks, VCs, publicly traded companies, and local startups showed up to the “gala event.”
The first panel was entitled “The Great Debate: Go Public or Stay Private,” with the following venerable participants:
- Larry Leibowitz, the current COO of the NYSE Euronext, and older brother to Daily Show host Jon Stewart;
- Moti Weiss, co-founder and general partner of Plenus, Israel’s pioneer venture lending fund;
- Iain Murray, senior executive VP at Soitec;
- Gal Israely, co-founder and managing partner of Cedar;
- Abe Reichental, President and CEO of 3D Systems;
- Josh Kiernan, a partner at the White & Case law firm
- The host was William Bowmer, a Managing Director at Barclays Capital.
The panel discussed the virtues and vices that startups face when deciding to go public or stay private, or, as one audience member pointed out: to get bought out.
Some overall conclusions offered by the panel:
- Companies are perched on the sidelines anxious to go public.
- Rough waters in Europe are pushing European companies to go public in the US. European shares are undervalued relative to the US.
- Investors are more likely to invest in “good stories.”
- Extremely important for companies to plan their IPOs during a “strategic window” that will increase their odds of success. This window could be a single day conference, a specific rumor, or news.
- Going public is not easy: companies should be preparing for IPO in terms of media communication and internal management over a year ahead of IPO. Poor communication with investors can lead to being mis-valued as a stock.
- Consider a dual-track process: an IPO or getting bought out. This also helps any M&A possibilities, and gives a more accurate picture of your company’s value. Also more expensive.
- Stay private only if you can grow fast enough to pay your employees and investors. And don’t forget to invest in costly R&D, which turns many private companies to the public market.
Below we bring you the main soundbites from the event:
Larry Leibowitz took the lead: ‘In 2010, there were $270 billion awarded to IPOs; but in the first 9 months of 2011, IPOs only generated half that much. Today, 4 of 6 exchanges associated with the NYSE Euronext are Asian, pointing out to the large opportunities in those markets. October 2011 was the worst month for IPOs since 2008. He explained these statistics by saying that “there is a lot of cash on the sidelines waiting for deals. Investors want IPOs, but there are alternatives.” ‘Investors are looking for “good stories” like Groupon. But with the uncertainty regarding the recession, investors remain on the sidelines; there are many companies ready to go public, or thinking about it, and they are waiting for the window to jump.’
He pushed again that companies are “perched,” on the sidelines and ready to go public. That European companies don’t want to go public in Europe because of the cloudy outlook that is unlikely to lighten up. Many European companies are starting to go to the US to raise money.
Moti Weiss continued by saying that the volatility in the European markets can hurt a young company going public. Volatility causes instability in liquidity that a young company so badly needs. This has caused companies to be undervalued in the European exchanges.
Josh Kiernan mentioned that the Sarbanes Oxley act originally “ran companies to the hills” and to London specifically, but is now responsible for the shift back to the US. Investors now view the US “as a market where investors have a better understanding of what [companies] are doing.” Regulations have not gotten easier, yet “compliance costs have gone down considerably, and maneuvering through the process is less daunting and scary. The US markets have generally proven themselves as giving better valuations, and long term liquidity.”
Abe Reichental: our shift from Nasdaq to the NYSE has boosted credibility and public relations. Now we tell the story to a more sophisticated class of investors, which also reduces volatility. And while the initial IPO can take many months to complete, follow-up rounds “take about 4 days, and the next one could be overnight.”
Larry Leibowitz: “If you are thinking about going public in the next 2 years, then you should be doing the things a public company would be doing, be run like a public company now.” “Companies trading in the US versus London, have had 20% higher PE multiples, even higher now, because of the higher compliance in the US.”
Iain Murray: “If you aren’t prepared, don’t go public.”
Larry Leibowitz’s advice to Israeli companies: “Start to get media training. What are investors going to expect once you go public? It’s a major shock as a company communicating with the media, and we weren’t getting the right multiples because we weren’t communication properly. What kind of messages do you want to get out? How do you want to talk to analysts and bankers on the other side? This affects how well your IPO does on the first day, and take and keep the right investors for the long run. Understand what your story is, be consistent about it, transparent about it, and truthful about it.”
Moti: Are you ready to go public? “It doesn’t end the day you go public, it just begins.” “If you don’t have over 100-150 million in revenue, then stay private, it is quite hard in the public market with that little revenue.” An ipo is not really an exit, it is a liquidity event. It is not the end game, and if you think so, then you are missing the point. It is a 1-mile marker on a 100 mile road. Founders are often restricted to how many shares they can sell in the IPO, and this is to keep their skin in the game.
Josh: A lot of companies have IPO’d with less than 40 million in revenue, now you need a minimum of 70-100 million to IPO. There is now a lot of market volatility, so what happens is that there are “windows.” “The sun comes through the clouds.” Take advantage of these windows. While working on 2 follow-ons, he tried pricing a deal on the day of a downgrade, which was not a good idea. Afterwards, he found a one-day window, did a one-day road show, and raised $100 million dollars.
Consider a dual-track process. Which gives you an alternative exit option if the IPO does not happen. It can also help the M&A process. It will help build up interest in your company; “buyers take the view that if they don’t grab you before the IPO, then it will cost them a lot more to acquire you after the IPO. After IPO-ing, companies get over 25% pricing for their company in a buyout situation.” He thinks that companies should take a buy-out offer if the timing is not right for an IPO. But if your long term strategy is to go big and public, then go IPO, and that timing window is less important. But if you are trying to get bought out, then do the more costly dual-path method.
Larry: After attending a recent VC congress in Israel, he found out that merger exits are not as profitable as IPOs in terms of building VC returns. Dual-tracks do serve a purpose, but there are costs associated with both. But that method does help you price yourself better to the market.
Iain: Be prepared, and start acting like a public company now, if your plan is to become one. Manage expectations. What you say about the next period is critical. Have a consistent story. analysts and investors like to hear a consistent story, and not being consistent makes it difficult to gauge the future. Pay attention that your company may be gauged with not only a competitor, but with a customer of yours.
Larry: “We [NYSE Euronext] get priced like a bank. Do companies know what your business actually is? Sometimes the market is beyond your control, so don’t worry about that, do what you are doing an execute your business plan. What is the market telling me? Is it telling me that something is wrong with my business, do I not understand the competitive landscape? Complacency is your biggest enemy. If you execute a good plan with discipline and explain your story, then your stock will trade according to your fundamentals.”
Gal: As a VC, we either look at M&A or IPO exists. “The IPO route for Israeli companies has not been very good.” For VC backed companies on the nasdaq, there were only 15 IPOs, versus 300 M&A transactions during the same 10 year period. “And the IPOs have not fared so well immediately following the IPOs. We don’t know why its happening. But for me, it doesn’t matter, it is happening. Most deals are looked at as M&A transactions. If you don’t build the company as a standalone, then you are building a technology company that gets only 10s of millions in a buyout, on the other hand, if your technology is showing really good numbers then you can move up to the 100s of millions.
Moti: The VCs need to decide. “Is this going to be a big company, or just another exit. I think that one of the problems in Israel, if you look at other markets, VCs can support companies to a certain stage, and then to a next stage private equity.” Looking at successful IPOs on the Nasdaq in the last 10 years, all IPOs over 1 billion dollars, have had 3 or 4 M&As in their lifetime. “So you have to be ready to be a very big company. VCs can only take a company to a certain stage, then they need to be ready to hand it off to another equity firm, you have to be able to participate in M&As. You can’t go big by having one technology or one product.”
Gal: “Israeli companies sell themselves too soon, that is a fact. We can argue why, but thats a fact. We have to take that into account when looking at investments. Usually management says ‘I’ve had enough’ and you can’t move forward to grow a company very large. The difference with a public company and non public company, is that the management thinks to jump off ship.”
Josh: “As a service provider we want you to go public, but stay private and be prepared to go public at any time.”
And finally, there was one question from the audience:
“Go public, or go public later, or get bought out is the question. Stay private is not really an option. There are companies that stay private and never go public. Is that off the table? Are we all just brainwashed by Wall St.?”
Gal: In high-tech, the majority of the money at a certain point comes from VCs or later stage investors who want exits. If a company stays private forever, then VCs can’t recoup their money.
Larry: A lot of private companies are family driven, with patience. If you want to stay private as a tech company, you need to grow so fast, that employees and investors need to feel that they are getting profit right away. To pay people enough, and pay off investors. The tug of war happens here.
Iain: You need to build fast, build R&D, there is so much risk. At some point in time we don’t have an option but to go public.
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