Initial public offerings may be coming off the endangered business species list. Soon.

But the “dot com” splurge is over.

Instead, some larger companies with solid revenues and profits may see a 2002 more receptive to IPOs than dismal 2001, say investment banks, law firms and venture capitalists in the southeast.

Smaller technology firms are not likely to see an IPO window open before next year, they say. Even then, traditional values (well managed companies with profits and significant potential growth) will decide which companies can successfully go public.

Nevertheless, at least one local software firm, Togethersoft, is often mentioned as a possible IPO candidate. And the outlook for biotechnology companies is generally better than for information technology firms.

Dennis Dougherty, a founding partner with the Triangle’s largest venture fund, Intersouth Partners, tells Local Tech Wire, “IPO activity is picking up and that’s good, but it’s not immediately good for private equity markets.

“The first companies to go public will be those lined up for quite a while waiting for an opportunity. Then, profitable companies will go. Next the market will open a bit for the class of private equity companies with a fair amount of venture backing, and a proprietary technology,” Dougherty says.

Return to traditional metrics

Attorney Christopher Matton with the Triangle office of Kilpatrick Stockton LLP, says, “My general sense is that we’re seeing a return to traditional metrics.” Matton’s firm has many regional technology firms as clients.

“The days of being able to go out on something a bit further along than a business plan are over,” Matton says. “There’s no reason to believe that when we return to IPO markets, we’ll return to 1999 levels of what it takes to get out the door.”

One CEO of a regional company at a the recent Money & Markets conference the NC Council for Entrepreneurial Development held Jan. 25 said, “CEOs are optimists.” Some of them are even optimistic enough to hope for an eventual IPO.

“I’m hearing more whispers about companies preparing or filing documents related to IPOs,” Matton says.

“That’s arguably somewhat premature. But in the infotechnology space, people are thinking about making those filings if and when the window opens. It’s a matter of preparing the appropriate documents to position themselves,” he says.

Life sciences may lead the way

“There’s a greater degree of activity on the life sciences side and my general impression is that we’ll see life sciences leading the way. From an outsider’s perspective, I’d say Merix Biosciences is a candidate,” Matton says.

Triangle-based Merix landed a record setting $40 million venture round in the fourth quarter last year. It is developing a cancer vaccine potentially effective against many forms of the disease.

Matton cautions, however, “Anyone looking for a significant degree of activity starting tomorrow is premature.”

CEOs are not the only optimists. Investment banker Michael Sigman with New York City-based Wit SoundView (Nasdaq: WITC), which does a lot of deals in the southeast, says, “We’re already seeing an up-tick over last year, which was miserable for tapping public markets. We’re already involved with a half dozen public offerings and we’re on the road with some of those deals.”

Togethersoft mentioned as IPO candidate

Sigman says in a recent trip to the Triangle, the company that impressed him most was Raleigh-based Togethersoft. Togethersoft sells a software suite that helps companies manage new software development efficiently. The company’s high profile clients include Cisco, Motorola, NASA, Nortel, Home Depot and the Bank of America.

Sigman says that he also expects to see a resurgence of interest in the semiconductor area. “Semiconductors are a leading indicator in the technology market. They’re the first to get hurt and the first to come back. They’re the foundation of the entire computer industry.”

His own area of expertise, software, is not robust right now but “a confluence of factors leads me to a more optimistic feeling,” he says. “It isn’t just IPOs, but all types of transactions across the board, mergers and acquisitions, private equity, are seeing more activity. It’s not what it was in the heyday, but it’s doing much better.”

Sigman says he’ll be in Raleigh again in the first quarter to meet with private software companies looking to tap public markets or sell on the merger and acquisitions side.

Some remain skeptical

David Blivin, managing partner with Southeast Interactive Technology Funds, is among those who is a bit more reserved.

“I’d be surprised to see much IPO activity in the first half of 2002,” he says. “It’s takes about six months to get through the preparation process.

“If the market moves in the right direction and holds onto gains, we’ll see an appetite for IPOs return.

“But it’s still going to revolve around companies with a traditional story: profitability.”

Blivin says he does not think many late-stage, venture-backed companies still losing money will see much of a window. Companies with traditional stories, profits, good management, potential, must launch successful IPOs before less traditional companies will have a shot, he says.

“It will be 2003 before we see an appetite for high growth companies still losing money but with high market potential, the types we saw before. The most likely exit for these will be acquisition by public companies looking to buy if their stock prices go up and they have the currency in hand to buy,” Blivin says.

Blivin also mentioned Togethersoft as one potential IPO candidate, though he does not see it filing this year. He says regional companies that filed previously for an IPO then withdrew, such as HAHT, have little if any advantage in filing again.

“The rules have changed, so I don’t think being in the process before helps,” Blivin says. “

Action expected in last two quarters

John Yates, attorney with the Atlanta office of Morris Manning & Martin, LLP, tells LocalTechWire he wouldn’t be surprised if the market opens up in the last two quarters this year.

In 1999, Morris Manning & Martin handled more IPOs than any other firm in the
southeast. IPO Reporter ranked it in the nation’s top 10 law firms when
ranked by IPO dollars raised. It also helped clients in obtaining $580 million of financing during 2000, including 9 of the top 25 venture capital deals in the southeast, and represented clients in mergers and acquisitions worth more than $7 billion.

Yates served as chairman of the Georgia Technology Forum in 1998 and 1999, and serves on several corporate boards.

“I’ll be surprised if you don’t see a dozen companies file in the second half of the year,” Yates says, emphasizing that those will be companies “that survived and prospered, generate revenues and show profits.”

Both Yates and Dougherty of Intersouth noted that while biotechnology appears hot right now, to some extent that is because information technology tanked in the last two years.

“I don’t think biotech has moved much more than plus or minus ten percent from where it’s always been,” Yates says.

“I think if you look at the actual deals being done, it’s about the same as it’s always been in biotech,” Dougherty says.

Yates suggests that one thing the southeast should worry about is investment bankers who opened offices in the region “at the wrong time.”

“We have to be prepared to attract those investment bankers back,” he says.