Hopes High as Number of IPOs Increases

The fourth quarter of 2009 saw an uptick in companies registering to do an initial public offering (IPO). Thirty companies entered the pipeline, considered the most activity in two years, and the average size of proposed deals was $191 million, said Ernst & Young. A large number of pipeline companies are from California. And two are from the greater San Fernando Valley region, including the Woodland Hills-based Internet marketing firm ReachLocal and Burbank-based Healthcare of Today. Following a sluggish 2009, hopes are high 2010 will see a continued increase in IPO activity. But the first couple months haven’t quite been boom times. Some local companies are still optimistic. But at least one has shelved its IPO plans altogether. “We are seeing IPOs go through,” said Jackie Kelley, Ernst & Young’s Americas IPO Leader out of Los Angeles. “And there are a number of companies that have re-engaged their filings.” There were 86 active registrants at the end of Jan. 2010, she added. Technology companies, real estate investment trusts, pharmaceutical firms and biotech companies are some of the prominent players. Kelley said it’s a positive sign that the pipeline has a variety of industries represented. The market is still volatile, she said, but it has stabilized enough to see new entries. There’s a lot of capital interested in investing in IPO companies and there are a lot of companies talking about going public that have not yet entered the pipeline. But firms need to be rock solid. “The bar is higher for investors these days and companies need to have strong financials and growth plans,” said Kelley. “As a result, companies have to be well prepared when going into the IPO process.” Venture backed exits also showed some positive signs of life in Q4 2009, with 13 venture-backed IPOs and 262 merger and acquisition transactions, according to the National Venture Capital Association. Many VC firms slowed new investment activity in recent years, opting instead to deploy more capital to existing portfolio companies. Increased IPO activity gives them an opportunity to exit companies, realize their return on investment, and re-invest. ReachLocal officials could not comment for this story, because the company is still in a quiet period following its registration with the Securities Exchange Commission at the end of December. Its proposed IPO is for up to $100 million. But Healthcare of Today, which acquires and develops companies primarily within the healthcare industry, shelved its IPO plans and is attempting to go public via non-traditional means. In early January the company entered into a definitive agreement and plan of merger with SK3 Group, Inc. (Ticker symbol: SKTO). The two companies plan to merge into a newly-formed Nevada corporation that will apply for the NASDAQ listing. “The decision doesn’t have to do with the favorability of the current IPO market,” said Lilly Ghahremani, spokesperson for Healthcare of Today, adding going public via merger is simply more appropriate for the company to accomplish its long-term goals. Principals of Agoura Hills-based BeyondTrust, an information security firm, have their eyes on the IPO markets. The firm, which is not yet in the pipeline, hopes to go public in early 2011. In 2009, activity slowed because there was a lot of concern about the economy, said Steve Kelley, executive VP of Corporate Development for BeyondTrust. But in the second half of the year, a number of quality companies that solve “mission critical” needs in their respective markets were able to go public. “What we see is windows tend to open and close…sometimes rather quickly,” said Kelley. What seems to be happening now is the IPO markets look better when news about the economy is on an upward trend, he added. Unemployment numbers, among other macro economic issues, are likely to have a big affect on the markets in 2010. In the meanwhile, BeyondTrust is focusing on building a strong track record of growth. The company’s new license revenue growth was 56 percent in its last year over year figures. And it’s expecting 40 percent growth in new license revenue this year. Kelley said the company is also putting all of the necessary corporate governance elements in place for when it does decide to go public.