Friday, June 27, 2008

New England’s IPO drought is longest in five years

By Christopher Calnan

New England venture-backed companies have yet to complete an initial public offering this year — the first time since 2003 that no such IPO has closed by midyear.

At least five VC-backed companies had registered to complete IPOs this year, but with 75 percent of the companies that went public last year seeing their shares trading below the issue price, companies in registration have been holding off.

Last year, nine local VC-backed companies had completed IPOs by midyear, and 20 went public in all of 2007. Nationally, the second quarter was the first three-month period in 30 years of tracking by the National Venture Capital Association that no VC-backed company went public. Last year, 25 IPOs had been completed in the second quarter.

New England companies this year have sought other means of investor cashouts, including more mergers and acquisitions, or have foregone liquidity entirely, heading back to investors for later-stage capital — a tack taken earlier this month by Nashua, N.H.-based Nitro-Security Inc. after company officials withdrew IPO plans.

And VCs are stuck in the middle.

“When you close the pipeline at the back end, you can’t stuff anything in the front end,” said Paul Maeder, general partner for Lexington-based VC firm Highland Capital Partners LLC.

A 2003 repeat?

Locally, it has been five years since a calendar year has passed without a single VC-backed New England IPO. The most recent public offering by a VC-backed local company was completed in December 2007 when Andover-based Memsic Inc. (Nasdaq: MEMS) raised $60 million on the public markets.

Although Netezza Corp.’s stock price has dropped from its $16.50 offering price to about $12 per share, CEO Jit Saxena said the Framingham company got what it needed out of the IPO — liquidity for investors and the added credibility from being publicly traded.

“We’re happy we did it, when we did it,” said Saxena. “To a large extent, we’ve accomplished those objectives.”

Netezza (NYSE: NZ) raised $108 million with its July 2007 IPO.

Pipeline clogged

Waltham-based lithium ion battery maker A123 Systems Inc. has been rumored to be one of New England’s top IPO prospects — and some have suggested it could be the region’s first $1 billion VC-backed IPO. But A123, which has raised more than $102 million in venture capital since launching in 2001, hasn’t even registered for an IPO.

The pipeline of companies that have filed for an IPO includes Merrimack, N.H.-based GT Solar Inc., which registered in June 2007; Framingham-based Glasshouse Technologies Inc., which registered in December 2007; Woburn-based LogMeIn Inc., which registered in January; and Lexington-based Gomez Inc., which registered in May.

Storage service provider Glasshouse, which registered in December 2007, is also a strong IPO candidate, said Christopher Pasko, a Boston-based senior managing director for private equity firm Blackstone Group LP (NYSE: BX). Glasshouse has taken in $50 million from investors since 2001.

With the IPO window sealed, more companies are opting for mergers and acquisitions. For example, last week’s acquisition of Waltham-based Navic Networks Inc. by Microsoft Corp. may not have happened if conditions for an IPO were better, according to Pasko.

“If the IPO window were open, (Navic Networks) at best would have had a choice to make,” he said.

Companies have also sought more creative financing strategies, such as carveouts (when a parent company sells a minority stake of a subsidiary) and reverse mergers (when a private company acquires a public company to bypass the IPO process). For example, last fall Connecticut package-delivery price-comparison firm RedRoller Inc. (OTC:RROL) completed a reverse merger with Aslahan Enterprises Ltd. And in February, Worcester’s RXi Pharmaceuticals Corp. (Nasdaq: RXII) won approval to begin trading as a separate entity from parent CytRx Corp. (Nasdaq: CYTR).

And such financing methods have also meant that the earliest startups may be overlooked as VCs focus on existing investments that need to be funded as they wait for a liquidity event, such as an acquisition, instead of an IPO, according to NVCA president Mark Heesen.

“We continue to fund companies we thought would be out of the nest as opposed to investing in early-stage companies,” Heesen said.