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The IPO Dilemma

The IPO Dilemma

Towards the end of April, ARN reported on the stock market correction, which followed months of analyst warnings that the high price/earnings ratios of Internet companies were at "bubble" levels and would burst.

Peter Williams, national partner in charge of e-business at professional services firm Deloitte Touche Tohmatsu, said that prior to the correction, the market had gone up in an "absolute frenzy" from about January.

He believes some of the companies which had listed when technology stocks were so highly valued did not have real strength in their business models, and in some cases had gone to the market too early.

Since the April correction, the landscape has changed and resellers considering listing need to take that into account.

Williams said that, in the current climate, companies looking for a successful listing on the ASX needed to be able to show revenues, growth and something which was unique or could be taken globally. "For a technology [company] that's looking at listing now, the valuations are going to be significantly down on what they would have been had they gone pre-April."He also advises resellers to think very carefully before going to the market at the moment. Williams suggests that, in addition to assessing whether or not to list, companies should also consider alternatives, such as private equity or venture capital funding.

Meanwhile, Williams said resellers considering a listing need to make sure they can differentiate themselves. "If they go up as just another tech stock, which looks like a dot-com with no real originality to it, they will struggle," he warns. "Once you go to the public markets, it's a dog-eat-dog world out there .

. . "

The alternatives

Listing on the stock exchange is not the only option for channel companies wanting to grow. Rolf Jester, research director at analyst Gartner's research and advisory services (RAS), suggests a company considering its next phase of expansion should look at different sources of finance.

In addition to listing, Jester advises companies to assess avenues such as venture capital funding. "This [venture capitalist funding] is now a maturing, rapidly growing industry in Australia," Jester said.

He said there were pros and cons on both sides and the decision on which route to take should depend on what "state of evolution" a company was at. Going with other forms of investor, such as private placement or venture capital, may provide a company with "more than just money", he added.

"You're getting management talent, you're getting good solid business advice, or potentially you can . . . get access to networks of people . . . access to networks of potential customers, potential channels, potential partners and potential new markets overseas."According to Jester, for a successful IPO, resellers need management talent, access to the resources they will require, a clear understanding of their market and the potential growth paths they have, and connections with the right partners and marketplaces overseas.

"If they've got all that in place already, they're probably ready for an IPO," Jester said. "If not - if they're at a less-mature stage - they may need the benefits a different form of financing can bring, which is not just about pure commodity dollars, if you like, but about good business advice packaged with those dollars."ListedOutsourcer and systems integrator KAZ Computer Services listed on the ASX in March. Peter Kazacos, managing director of KAZ Computer Services, said that when KAZ had listed, one of the key things had been differentiating itself from a dot-com, to both investors and analysts.

"Yes, we are a technology company, and therefore we can take advantage of the growth in that sector," he said. "[But] we are established and we have a track record of revenue and profit growth and because of outsourcing . . . multi-year contracts, we have a certain level of committed revenues and profits going forward."Kazacos said KAZ Computer Services had made the decision to list about July last year, although it had done some exploratory work prior to that.

He advises that when preparing for an IPO, it's important to work with people who have experience in this area. "The only people who were learning [were] us and that's important because the other people all taught us what needed to be done and we went through the process."He said the relationship with these companies often continued post-listing.

"Prior to listing we had employees, customers and suppliers. Now we have the market and we need to see the market on the same level."He cites the benefits KAZ Computer Services has seen as a result of listing as credibility with potential customers, shares and share options for staff, the potential for making acquisitions and easier reach into different regions.

According to Kazacos, listing had provided the company with access to opportunities it hadn't previously had.

Under consideration

Whether or not to list is a decision channel companies often consider as part of their plans for growth. Larry Bloch, CEO at domain management company NetRegistry, said it was "continually evaluating" its capital requirements.

Asked whether NetRegistry was going to list, Bloch said it was keeping its options open and hadn't really set any specific targets or objectives with regard to listing.

"I think ultimately, certainly as I look forward, I would be very surprised if we weren't a listed company within a space of time."Bloch said there had been a "fundamental change" in April. "I think pre-April, whilst capital was easy to get, there wasn't much distinction made between what I call dot-reals and dot-coms. I think that capital markets were looking at any Internet company, regardless of what their business plan was, as something worth investing in."He believes the capital markets are now looking at companies which have revenues, profits, are solid and have an achievable business plan.

"So, I guess, part of our reason for delaying has been to allow the capital markets and investor community to settle a little bit and to start understanding the criteria they want to invest by."Bloch emphasised that NetRegistry was a "dot-real", which meant it was a real company with real revenues, ". . . profitable from almost our first month of operation, we've grow organically and we believe that that kind of story is something that the markets will take favourably."But how do you decide?Ultimately, it is up to individual channel companies to decide for themselves whether an IPO, or an alternative, is the best solution in order to grow.

Gartner's Jester suggests resellers look at different sources of money when trying to make the decision, and assess which stage of development they are at.

NetRegistry's Bloch agrees with careful assessment before embarking on an IPO.

"In 1999 everybody looked at an IPO as a cheap way to gain access to capital, but I think a lot of those companies are now suffering from that because they're now having to live up to all the promises they made, which perhaps were a little ambitious. Maybe they didn't have enough business background to be able to forecast accurately."He said a company needed to decide whether it had a robust enough business model, and enough of a track record, to be able to predict its business outlook with confidence. "If that's not the case, then companies should perhaps be looking at private equity raising as an intermediate or mezzanine stage before going to the market."He believes the market has moved away from "how quickly you can generate a massive client base regardless of whether you're making money out of them".

"I think the market has come back [to] some of the ‘old' metrics of how good the management is, what the board looks like, what the underlying fundamentals of the business are."Kazacos suggests resellers think long and hard when they are considering listing. "My view is, if you're going to list the company, you should have in your mind that you want to take the company to the highest level it can reach and you should be willing to invest in doing that," he said. "You've got to have a long-term vision and you've got to be able to ensure you progress that vision and also understand there's a responsibility, that it's an important step."He agrees that the correction has probably made companies think more carefully when deciding whether or not to list. "I think that one of the things that was out there in the marketplace [with] technology stocks, was ‘we'll list, we'll list'."Kazacos is critical of companies which have listed for the wrong reasons. "The thing I don't like is that some companies have listed, they haven't done so well, and it's tainted some of our industry. A lot of companies should realise that they should respect other people in the IT sector and really only take that step when they feel it's the right thing to do."The Listing ProcessMid last year, the Australian Stock Exchange introduced a new system for companies who did not fulfil the traditional criteria which needed to be met in order to list.

Gervase Green, spokesperson for the ASX, said it had become apparent that a number of companies, including those in the technology area, wanted to list but didn't fit the traditional requirements.

"The market was quite prepared to place a sufficiently high valuation . . . on companies that were pretty new, and in fact certainly didn't have a three year earnings history and might not be more than a dot-com technology concept and some sort of a business plan."Historically, the criteria for companies to list on the ASX has included being able to show net tangible assets of a certain amount, market capitalisation of $10 million and a three year earnings history. " . . . [These are].things an investor would use normally in judging a company's worth," Green said.

"So what we did is brought in a different sort of admission for them, saying ‘OK, given that the market is prepared to place a certain value on you even though you're very new, rather than turn you away we will allow you to list'." Requirements for these companies include having a business plan outlining how the company is going to spend its cash, and quarterly reports for the first two years outlining how much cash the company is going through.

"That's to provide investors with the information they don't have because they [the companies listing] are new and it's a new area," Green said.


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