2009 IPO Report - WilmerHale

US IPO Market Review and Outlook5Profile of Successful IPO CandidatesWhat does it really take to go public?There is no single profile of a successful IPOcompany, but in general the most attractivecandidates have the following attributes:■Outstanding Management: An investmenttruism is that investors invest in people,and this is even more true for companiesgoing public. Every company goingpublic needs experienced and talentedmanagement with high integrity, avision for the future, lots of energy towithstand the rigors of the IPO process,and a proven ability to execute.■Market Differentiation: IPO candidates needa superior technology, product or servicein a large and growing market. Ideally, theyare viewed as market leaders. Appropriateintellectual property protection is expectedof technology companies, and in somesectors patents are de rigueur.■Substantial Revenues: With someexceptions, substantial revenues areexpected—at least $50 million to $75million annually—in order to providea platform for attractive levels ofprofitability and market capitalization.■Revenue Growth: Consistent and strongrevenue growth—25% or more annually—is usually needed, unless the company hasother compelling features. The companyshould be able to anticipate continuedand predictable expansion to avoidthe market punishment that accompaniesrevenue and earnings surprises.■Profitability: Strong IPO candidatesoften have track records of earningsand a demonstrated ability to enhancemargins over time.How Do You Compare? Some Facts About the IPO MarketSet forth below are selected metrics about the IPO market, based on combined datafor all US IPOs in 2007 and 2008.Median offering sizeMedian annual revenue of IPO companies$120.5 million (13% below $50 millionand 8% above $500 million)$87 million (34% below $50 million and 13%above $500 million)Percentage of IPO companies that are profitable 62% in 2007 and 71% in 2008Aftermarket performanceState of incorporation of IPO companiesPercentage of IPOs including sellingstockholders, and median percentage of offeringrepresented by those sharesPercentage of IPOs including directed shareprograms, and median percentage of offeringrepresented by those sharesPercentage of IPO companies disclosingadoption of ESPPPercentage of IPO companies using a “Big 4”accounting firmForm of outside director compensation paid byIPO companiesStock exchange on which the company’scommon stock was listedMedian number of Form S-1 amendments(excluding exhibits-only amendments) filedbefore effectivenessMedian IPO expensesBy year-end, average IPO price increased15% in 2007 and decreased 36% in 2008Delaware—93%No other state over 1%Percentage of IPOs—51%Median percentage of offering—26%Percentage of IPOs—47%Median percentage of offering—5%28%77%Cash only—10%Equity only—3%Cash and equity—87%Nasdaq—65%NYSE—32%Amex—3%FiveMedian underwriting discount 7%Time elapsed from initial filing to effectivenessof the Form S-1Legal—$1,200,000Accounting—$810,000Total—$2,760,000Median—117 calendar days25th percentile—89 calendar days75th percentile—170 calendar days■Market Capitalization: The company’spotential market capitalization shouldbe at least $200 million to $250 million,in order to facilitate development of aliquid trading market. If a large portionof the company will be owned by insidersfollowing the IPO, a larger market cap maybe needed to provide ample float.All IPO companies need top executive talent,a strong competitive position, adequate marketcapitalization and deal-savvy advisors, butother factors can vary based on a company’sindustry and size. For example, many biotechcompanies will have much smaller revenuesand not be profitable. More mature companiesare likely to have greater revenues and marketcaps, but slower growth rates. High-growthcompanies are likely to be smaller, and usuallyhave a shorter history of profitability.Beyond these objective measures, IPOcandidates need to be ready for publicownership in a range of other areas, includingemployee recruitment and retention; accountingpreparation; corporate governance; financialand disclosure controls and procedures;external communications; and a varietyof corporate housekeeping tasks.