5
News
June 28–July 4, 2011 Business in Vancouver
full disclosure
Richard Chu
Dominic Schaefer
have a good story to tell and the guy on the other side is guaranteeing you that the deal is done. If you get a best efforts offer, that’s the smell test right there. The guy’s saying it might not happen.”
Alan Hibben, managing director, M&As, RBC Capital Markets: growth-oriented IPOs challenged by “closetindexers” in Canada
Davis Vaitkunas, director, Bond Capital: going public can be the most expensive way to raise growth capital
is a social network and is in a new sector that’s changing the behaviour of professionals. That’s a secular story that’s taking place and makes for a great story.” But Canadian tech firms would have to compete with the country’s solid international reputation as a market into which mining, energy and other resourcedriven companies can readily tap to raise funds from investors. According to the TMX Group’s annual report, more than a third of the 484 new issuers last year on its exchanges were mining-related. More than 10% of IPOs were in the oil and gas sector. Overall, nearly half were resource-related issuers. Only a relative handful was technology issuers in 2010. “In terms of investor sentiment, the tech sector and the clean-tech sector comes second to the resource sector,” said Lee Davis, managing director of PwC Corporate Finance in Vancouver. “Canada has become viewed as a resource market, as it was back in the ’50s. It’s not that we don’t have a great tech sector, but the window for investors is huge for the resource side, where investors are pouring in.”
would ideally be done at a later stage in the company’s development where companies are looking for tens of millions of dollars to take their company to the next level. The attractiveness of the offering will be driven by a combination of factors: • the market size they’re going after; • the current revenue and revenue growth potential of the business in the near term; • how novel is their product or service offering; • what the competitive landscape looks like; and • will the markets reward the company with premium multiples if they achieve their targets? “Large-cap market offerings should drive a high-potential company to a position of market leadership in a big market.” Until then, companies have a variety of sources of capital available to them, from angel investors and venture capital firms to alternative lending sources like mezzanine financing. While each alternative has its own set of costs and benefits, most are generally less expensive than going public (see “Beyond the Storm” – issue 1109; January 25-31).
Concrete rapid-growth plans needed for succesful IPOs For a non-resource company to have a genuinely successful IPO, most industry professionals agree that a business needs to have a solid growth plan in place to attract an investor’s eye. Davis noted the company not only has to have a management team that understands what it takes to be a public company, it needs to have a sound business growth plan that has a hockey-stick-like earnings growth curve. Hnatiuk said an IPO
Know whether there’s a market for your business Given evolving market sentiment, Davis Vaitkunas, director at Bond Capital, said entrepreneurs need to carefully consider the timing and size of a company’s public debut, because you only get one chance to make your entrance. He argues growing companies should have at least $10 million in EBITDA (earnings before interest, taxes, depreciation and amortization) before thinking about raising money on the public capital markets.
Lee Davis, managing director, PwC Corporate Finance: tech and clean-tech fall second fiddle to resource IPOs by investors
“Don’t forget, the public market is a beauty contest. You can be a great company with great fundamentals and still get no interest from the market. It’s not like a report card where you get rewarded for being profitable. You get rewarded for having a sexy story as much as anything.” Going public at t he wrong time, or even at the wrong price per share, can be detrimental in the long run for a company. Small public companies, especially those under $100 million in market capitalization, run the risk of becoming public orphans, where a company bears all the costs of being public but garners little, if any, public attention by analysts and investors alike. “As a general rule of thumb, if you’re going public for less than $100 million, you’re either crazy, have a huge ego or someone has talked you into it who is a very good sales guy. You have to know that even if you have $100 million market cap, you’re still at the small end of the game for institutional investors and analyst coverage that counts. Heaven forbid you are under $50 million market cap.” Vaitkunas noted the smaller the IPO, the higher the process of going public will cost, making it less beneficial for company owners and key shareholders who have decided to go public. He noted it can cost millions to go public in listing, registration, audit, legal and other fees, and companies will have to pay those costs on an ongoing basis once they’re public. Those that have decided to go public should also find out if their offering will be done on a “best efforts basis” or is a “firm offering.” “If you’re getting a firm commitment offer from an underwriter, it means you
Conservative Canadians limit market for venture companies For any company looking to go public, it will be vital to understand the dynamics of the market it will be trading in. Davis noted the IPO market has become global and it’s important to consider what exchanges will have investors most attracted to a company’s offering. Luxury fashion icon Prada, for one, plans to list in Hong Kong rather than on a European exchange because the region where it expects its future growth to be in is Asia. Companies looking to list in Canada will have to contend with a more conservative investor on both the retail and institutional sides of the market. Alan Hibben, managing director of mergers and acquisitions at RBC Capital Markets, noted at the CVCA conference that many institutional investors
don’t stray too far from the TSX60 index, thus excluding many growth-oriented companies in the tech and cleantech sectors. Retail investors have also come to expect dividends and distributions, having become accustomed to a steady stream of income stemming from the income trust market that created an IPO boom in the mid-2000s. Once a company is public, fulfilling the plan is key For Ross, the past 22 years as a public company have been challenging, but they have also led to some significant business developments that might not have happened otherwise. “It still offers [us] liquidity, and offers us an active board of directors, including Stuart McLaughlin [president of Grouse Mountain Resort], Gary Sutherland [former vice-president of RBC Private Counsel] and our chair, Cowan McKinney [deputy chair of Western Pacific Trust Company]. We probably wouldn’t’ have been able to attract them had we not been a public company.” • rchu@biv.com
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