For young medical device and drug makers, filing for an initial public offering came with an unwritten plan B: attracting a big corporate buyer or other investor, eliminating the need to go public.
But as money has dried up at private equity firms and big companies have grown more cautious about acquisitions, the process of using an offering as a prelude to a sale isn’t what it used to be, observers say.
“A year or two ago, when markets were much better, clearly companies used it as a strategy,” said Greg Soukup, who recently retired as leader of Ernst & Young LLP’s mergers and acquisition advisory services group. “In today’s market, you aren’t seeing a lot of IPOs because the capital markets are obviously very terrible to raise money.”
Eyeonics Inc., an Aliso Viejo maker of replacement lenses used in cataract surgeries, filed for an $86.3 million offering in 2007 but ended up being bought by Rochester, N.Y.-based Bausch & Lomb Inc. in early 2008.
The company seemed ripe for a good reception on Wall Street with its Crystalens, a high-end replacement lens, and some well-known investors, including William Link, a former device executive who’s a managing director of Versant Venture Management LLC, a venture capital firm with a Newport Beach office.
But Eyeonics also was on the radar of big eye device makers.
In 2007, Dennis McCarthy, a managing director with investment bank B. Riley & Co., predicted that Eyeonics “could be acquired by one of the big guys” before it had a chance to go public.
Bausch eventually moved in and bought Eyeonics for more than $80 million with an eye toward making it the linchpin of a surgical product expansion.
But McCarthy doesn’t believe Eyeonics or other companies go through the tiresome public offering process just to attract potential suitors.
“It’s such a hassle to file to go public,” he said. “It’s a lot of work. If you were really thinking you wanted to sell (instead of going public), you would probably do it on a much (quieter) basis than letting the world see what you’re doing by filing a registration statement.”
Irvine-based TherOx Inc. was the only local company to file plans in 2008 to go public.
The maker of devices and products to treat oxygen-deprived tissue during heart attacks said in September it hoped to raise up to $100 million but hasn’t yet set a date for an offering.
TherOx also could be an acquisition candidate.
Long Process
For those companies considering going public, the process generally takes a year or more and has several time-consuming steps, including hiring investment bankers and writing descriptions for potential investors, McCarthy said.
“The first time a company writes up its description, it takes forever,” he said. “Companies have to think about how they want to describe themselves, and then you get different opinions.”
Securities and Exchange Commission filings also require extensive disclosure, particularly information about management salaries and other forms of compensation, including stock grants and options.
“People hate to disclose that stuff,” McCarthy said.
And going public is a fairly costly endeavor,companies can pay millions of dollars to investment bankers, lawyers and other professionals in the process.
But the appeal of filing to go public could be that it offers two options: presenting the company to potential buyers and the prospect of going public if a sale doesn’t realize.
Just hiring an investment bank to shop a company wouldn’t serve the same dual purpose.
While offerings are dead for now, they could regain favor if the economy and Wall Street improve, former Ernst & Young executive Soukup said.
“If the economy gets back into recovery, I do think the markets will pick back up,” he said.
And that also could mean more companies being bought.
“If there are more of those acquisitions for companies that file, it’s simply because the opportunity to go public has been diminishing over time,” McCarthy said. “There are almost always a reasonable number of companies who file their IPO and end up being bought out.”
