The IPO spigot is on full blast in L.A. County.
In the last year, nearly a dozen locally headquartered companies completed initial public offerings, cumulatively raising $3.1 billion, even as private equity continues to flood the region.
By comparison, there were no IPOs from L.A.-area firms during the previous 12 months ending June 30, 2006.
The 11 companies taking their chances in the public markets run the gamut of local industries, ranging from giant real estate investment trust Douglas Emmmett Inc. and architecture and engineering firm AECOM Technology Corp. to tiny life sciences company Response Genetics Inc.
And if there’s a common denominator, it’s that local companies have finally shaken loose their fear of Wall Street that held sway three or four years ago in the wake of the Sarbanes-Oxley reforms and poor market returns.
“For a while, even as the markets climbed, there was some hesitancy among local firms that it wouldn’t last,” said Ron Butler, partner in the L.A. office of Ernst & Young LLP. “But in the last year, the Dow has climbed 2,500 points and hit record territory and even withstood a couple scares. It’s convinced firms that this time it’s real and you’re seeing more activity from the investment world.”
Indeed, nationally, IPOs have made big headlines in recent weeks, led by huge private equity firms Blackstone Group, which raised $4.1 billion, and Kohlberg Kravis Roberts & Co., which is seeking to raise $1.25 billion. Even hedge fund Fortress Investment Group Inc. is considering a $5 billion placement.
Nationwide, 115 companies held public offerings in the first half of 2007, raising $26 billion, according to Renaissance Capital LLC. That’s only slightly ahead of 2006, when 198 firms registered public offerings. But the pace appears to be picking up. On just one day this month July 2 eight firms filed for IPOs.
These figures have partially put to rest concerns that the U.S. financial markets are overly regulated when compared with their foreign counterparts, especially with the passage of the Sarbanes-Oxley Act.
Butler said that local companies and investment banks have finally figured out how to cope with the cumbersome requirements. “While it’s a burden, that burden has become more familiar and can be dealt with,” he said.
Taking the plunge
Indeed, at three of the local companies that went public in the last year, complying with Sarbanes-Oxley was not a huge problem.
“If you want to play ball with the big boys, then you have to comply with the regulations,” said William Powell, director of investor relations at Guidance Software Inc., the Pasadena-based computer forensics firm that went public last December.
Powell said that overall, the public markets were more attractive to Guidance than private equity. “With private equity, the question is who are the investors and what are they looking for in return for their investment. We wanted to raise the money and let the market decide.”
He added that the markets’ climb into record territory had some impact on the exact timing of the public offering, but didn’t affect the overall decision to go public. Guidance raised $57.5 million in its Dec. 13 Nasdaq debut, closing at $15.18 per share, well above its asking price of $11.50.
A similar set of decisions took place at AeroVironment Inc., the Monrovia-based aerospace and energy technology company.
“We looked at a number of strategies to raise capital. Other alternatives like venture capital and private equity meant ceding some control to outside entities,” said Steve Gitlin, director of marketing strategy for AeroVironment. “Going public meant we could keep our management team intact.”
Gitlin added that the favorable public markets made this decision easier. “Obviously, if the market was not receptive to IPOs in general, there might have been a different decision with respect to timing.”
AeroVironment started trading on the Nasdaq on Jan. 23, closing at $23.93 per share, 40 percent above its $17 asking price. The offering raised a total of $114 million.
As for Aecom Technologies, which had already scrapped an offering back in 2002, this past spring finally seemed to be the right moment for the architecture and engineering firm to go public.
“For us, the driving factor to go public was the need to raise capital for future acquisitions in a consolidating industry,” said chief financial officer Michael Burke. “Being public would allow us the public currency we needed to take on this merger and acquisition activity.”
The only question for AECOM was when to go public. While the overall market was favorable last year, it wasn’t until early this year that investor sentiment turned positive towards the architecture and engineering sector, Burke said.
Aecom filed for a public offering in March and went public on May 11, raising $703 million for the company. The offer price was $20 per share with a first-day close of $21.10.
Guidance, AeroVironment and AECOM have all seen their shares stay above their original asking prices as of the end of the second quarter on June 29. Indeed, only three of the 11 companies have seen their shares below their asking prices as of the end of the second quarter on June 29.
