MARKET DIVIDE
Public Offerings Face Wall Street Cooling; Awaiting Jazz
By CHRIS CZIBORR
2004 started with big hopes for technology public offerings. Six months into the year, reality has tempered those hopes.
Tepid receptions for stock debuts this year now have companies thinking twice about selling shares, according to lawyers and venture capitalists. That’s a change from a few months back when 2003’s stock market gains still were fresh on the minds of executives at private tech companies.
The result is a public offering market at odds with itself.
“Right now is the best start for IPO activity in four years,” said Michael Flynn (photo), a partner at Newport Beach-based Stradling, Yocca, Carlson & Rauth and chair of the firm’s corporate law department. “So far this year, there are many times the number of IPOs we had at this time last year. The bad news is that last month, several deals came to market all priced below their filing ranges. There seems to be some unease in the market about the pricing,there’s some softness. I’m not sure yet how it’s all going to play out.”
It’s not just softness in initial pricing for public offerings.
Companies that have gone public this year or last haven’t fared well on Wall Street.
That’s the case for two Orange County tech companies that have gone public in the past 12 months.
Newport Beach networking chipmaker Mindspeed Technologies Inc., which was spun off to shareholders of Conexant Systems Inc. a year ago, was trading above its 2003 debut last week. But the company’s shares are at half of their January high.
Mindspeed counted a market value of $545 million as of last week.
Tustin-based Cherokee International Corp., a maker of power supplies and rectifiers for computers and other electronics, has shrunk nearly 30% since its February debut. It counted a recent market value of $230 million.
That has some tech executives thinking twice about braving a public offering, according to George Wall, a senior partner with Costa Mesa law firm Rutan & Tucker LLP.
“The market’s gotten soft and people are a little concerned with where the market’s going to be headed right now,” Wall said. “So there’s a little more reticence by people on committing to go through the process as opposed to what was happening as recently as six weeks ago. It’s much better than it was over the last couple of years, but it’s cooled off a little bit.”
OC’s best-funded tech startup, Laguna Niguel-based wireless phone software maker Bitfone Corp., is taking a pass on going public this year, according to founder and Chief Executive Gene Wang.
“The ideal outcome is a very successful IPO,” Wang said. But trying to do so this year would be “premature,” he said.
That makes Newport Beach-based Jazz Semiconductor Inc. OC’s Google. Mountain View-based Google Inc.’s upcoming public offering has spurred the most interest of any tech offering since the burst of the bubble in 2000.
Jazz, a contract chipmaker that was bought out from Conexant in 2002, is “a class OC company,” Stradling’s Flynn said.
“That’s an exciting company to watch to see how they could go,” he said.
In January Jazz filed for a public offering that could raise as much as $150 million. Conexant still owns a big stake in Jazz, along with Greensboro, N.C.-based RF Micro Devices Inc. and majority owner Carlyle Group of Washington, D.C.
Jazz hopes to ride an industry trend of outsourcing chip production since plants require big investments to start and maintain. The company’s challenge is offering niche chip production services as big orders go to contract producers in Taiwan, and, increasingly, China.
The same things making for a tough year on Wall Street this year are clouding the market for public offerings.
“There are so many things that play into it,” said Don Williams, who heads Ernst & Young LLP’s Pacific Southwest region emerging and growth markets group from San Diego. “Certainly world politics is a much bigger piece of the puzzle today as the world becomes a smaller and smaller place. Oil prices are still up,that’s an issue people are continuing to look at.”
Add to that the prospect of higher interest rates and uncertainty about the presidential election in November, Williams said.
“There’s some consensus that over the next 12 to 18 months, if rates moved up a point, that’s probably not a bad thing,” Williams said. “The market will probably be able to absorb that change. But if you start seeing much larger shifts, there will be concern.”
Bruce Hallett, managing partner at Corona del Mar venture capital firm Miramar Venture Partners LP, said he believes investors are creating a self-fulfilling prophecy by adopting a gloomy outlook based on what’s going on in the world.
“People are so distracted by world events and historically low interest rates starting to move up that they are kind of overthinking the problem,” Hallett said. “I hope we don’t miss an opportunity for a great IPO market here, because companies,including a lot of the tech companies,are really delivering great results.”
The basics for tech companies looking to go public haven’t changed, according to Greg Yurkovich, a senior associate at Newport Beach venture capital firm Forrest, Binkley & Brown.
“It’s going to be a function of good management,” Yurkovich said. “You’ll need at least six quarters of consistent growth in earnings and a critical mass of customers. Technology is not the end-all and be-all,you’re just running a business. The companies that will do well have a sound balance sheet, customers and a great story.”
To be sure, OC is overdue for public offerings. A handful of computer and medical technology companies is sitting on large amounts of venture financing, waiting to take the next step.
In Ernst & Young’s overall outlook for public offerings, San Diego and Los Angeles have outpaced OC in offerings so far this year.
Harry Lambert, managing director with Costa Mesa-based InnoCal Venture Capital, said he expects a pickup in OC tech offerings by next year.
“We see pretty much a flat situation probably through the remainder of the year for OC technology companies,” Lambert said. “We don’t see any sort of landslide of companies going public,revenue and profits are not that encouraging and there aren’t that many prospects to begin with. We’re going to start seeing things get better, probably in the early part of next year as some of the companies mature. The picture is much more encouraging than it was a year ago and certainly much more than two years ago.”
