Going public today using the traditional IPO method has become extremely difficult. The reason being is the risk/reward scenario for underwriters has been greatly diminished. The number of companies that are using this traditional route has shrunk by over 90%.
It wasn’t until February 2009 before a single company went public on New York or London stock exchanges signaling the slowest IPO market in more than a decade. A pharmaceutical spin-off along with a emerging markets IPO got the ball rolling with a few more companies following but, all in all, the economy has slowed the IPO markets to a snails pace. So far, despite their scarcity, the new public companies have performed fairly well, though none have displayed blockbuster results.
The 2009 IPO Index, which is includes the seven major IPOs on U.S. exchanges this year, is trading slightly behind the S&P 500 this year.
Recently, we have started to see a small uptick in the IPO marketplace.
Over the past year too many great IPOs prospects, who would have long term growth potential, have had their public offering either (a) shelved or (b) share price slashed or (c) simply cancelled altogether. For a company that is depending upon the funding from an IPO a cancellation can be devastating. Not only has company management spent the better part of 18 months preparing for the IPO they are also out of pocket a couple of million dollars for related costs and fees for the public offering. The fact of the matter is the only IPO deals getting financed are large, established companies such as VISA that raised $19.7 billion in March of 2008.
The landscape for IPO’s has changed greatly. In the past IPO’s were distributed by underwriters to their wealthy clients or to institutional clients as sort of a “thank you” for doing business with them. In the past if a client was fortunate enough to be granted shares in an IPO it was almost a forgone conclusion he would make 15% to 20% on his money the very first day the stock traded.
Today most of the underwriters have either disappeared or opted to be converted into banks to survive the economic holocaust of 2008. Risk is currently not in their vocabulary. However we have seen a slight glimmer of hope in September of this year when a couple of IPO deals went to market and actually had positive aftermarket performance. Also there has been a 50% increase in the number of IPO filings over 2008.
Because of the market crash last year underwriters are skeptical when it comes to underwriting an IPO. If the market is erratic or there is sudden drop during the time an underwriter is trying to close on an IPO the presold commitment by investors could evaporate and your “sold out” IPO offering ends up being postponed or cancelled. Too much emphasis is placed on current market conditions and not on the long term view when it comes to IPO’s.
In these volatile market times it is difficult for companies to find an underwriter for their proposed IPO. That along with the cost factor and time it takes to complete an IPO works against any company that is seeking to go public within three to six months. The fact of the matter is going public through traditional means has never been more difficult. With the newly established FINRA being added to the IPO process companies are now seeing time frames for approval being increased by several more months
According to the Reverse Merger Report in our current economy more companies are going public without a contemporaneous financing. Those companies are choosing the most direct route to going public; a reverse merger into an OTCBB shell. Today, a company that has completed their audits can purchase an OTCBB shell for between $300,000 and $400,000 and become public in 45 to 60 days. After the company is publicly traded they will seek to raise the necessary capital needed through a PIPE financing. In comparison, according to CNBC, it takes a company an average of ten years from their formation until they can go public via a traditional IPO.
To attract a PIPE financing in today’s environment a company must demonstrate several attributes. The company must be revenue producing and profitable, have a business model that can demonstrate enormous growth and the company must be willing to take their financing at a low valuation. Today’s investors want to be assured there will be substantial upside after the investment is made. In the last eighteen months investors have seen many opportunities in the marketplace. Because of the number of deals that are being presented, investors are in the drivers seat. They will not only cherry pick the best deals but also dictate terms and conditions of the financing. Their sole concentration is to invest in deals that demonstrate the largest upside with the lowest risk.
As the IPO’s have disappeared the reverse merger market has started to gain momentum and flourish. The private investment in public equity (PIPE) market and the reverse merger business has emerged from the ruins of the Wall Streets meltdown in 2008. All of the failed issues and useless stocks that were traded on the OTCBB have become ‘Shells” that are now being scooped up by both US and foreign companies. Substantial companies that would normally have been candidates for an IPO now understand they must seek an alternative vehicle that allows them to go public without an underwriting. That vehicle is an OTCBB shell.
There is now a rebirth of the new issue market and that market is using old public shells as the vehicle of choice for bringing companies’ public. What was once deemed to be the red headed step child of the public markets is now a handsome adult who is gaining respect, attention and momentum. Just as a child needs guidance to reach their full potential as an adult so does a company that seeks to go public via a reverse merger needs guidance to flourish in the public markets.
Going public requires a lot of planning. Contrary to popular belief the finish line is NOT when your company goes public and your stock trades on the OTCBB. This is actually the start of the game, not the finish line. There are over 3,300 OTCBB companies listed. If you think investors are going to beat a path to your doorway, think again. Being public requires coordinating the before, during and after events of your company. It is like a giant jigsaw puzzle. If you do not have all the pieces of the puzzle you cannot complete the picture.
My prediction is that you will see reverse shell mergers outpace IPO’s for the next five years.
If you have read this entire 10 part series you should, by now, have a good idea of the possibilities of going public using a reverse merger into an OTCBB shell. Regardless of when you decide to go public you will need capable professionals to guide you through the entire process. It is important to understand there are many choices and pricing for services can vary greatly. Ventana Capital Partners provides all aspects of the going public process for companies seeking to go public via a reverse merger. These services may include providing the OTCBB shell, SEC attorney, PCAOB qualified CPA firm, funding sources and IR/PR investor awareness programs.
You may view the qualifications of Ralph Amato through http://www.linkedin.com/in/ralphamato.
http://reverseshellmerger.com/2009/12/07/going-public-in-the-next-12-months-part-10/
Posts
No comments:
Post a Comment