In Hostile Market, IPO Dreams Can Turn to Nightmares

It’s a CEO’s worst nightmare. And it’s one that came true for Jerry Welch.

A company is ready to go public, has filed documents with federal regulators, paid attorneys and printers, spent thousands traveling to talk to big-money investors, then, for some reason, the initial public offering is pulled. That leaves most companies scrambling to find other ways to raise money.

It’s a familiar scenario in recent months, with companies such as Welch’s Westlake Village e-commerce firm, RightStart.com, pulling IPOs because of a stock market climate hostile to new technology offerings, especially those from companies that sell things to consumers.

Just last week, HOB Entertainment Inc., the Hollywood-based operator of House of Blues music clubs and one of the nation’s biggest live concert promoters, postponed its $100-million IPO, citing “market conditions.” The company is expected to try again later this year, if conditions improve.

In fact, the number of California companies pulling IPOs this year through Thursday is up 180% to 28 firms, versus 10 at the same point last year. Nationwide, 66 companies have pulled deals, a 41% increase, according to Thomson Financial/Securities Data.

That can cost a company on average $500,000 in fees to lawyers and printers and for a “roadshow” to talk to investors, investment bankers said. Companies pay for all the printing of prospectuses and roadshow expenses, and those costs can rise into the millions of dollars. Additional costs can occur if a company is forced to arrange other sources of money, and then pay high interest fees.

“It’s an expensive proposition,” said Welch, who would not divulge how much the change in plans cost his company, which sells baby and children’s items on the Web. But he said it will be reflected in first-quarter earnings released today.

“We don’t think it won’t be so costly when we prepare to go public again,” Welch added.

Bankers who handle the deal don’t get paid until the IPO is sold, so they lose money too.

But the real cost is in a damaged reputation on Wall Street, analysts agree, as investors tend to take a harder look at a pulled IPO if and when it comes back to market, no matter how good the reason for pulling it.

“What’s more costly is the public perception that the company couldn’t get the deal done,” said Todd Jadwin, investment banker with Banc of America Securities in Los Angeles.

A deal that comes back to market after being pulled is seen as “damaged goods,” agreed David Menlow, head of IPO Financial.com, a data firm in New Jersey. “IPOs that are getting pulled now will have to wrestle with the fact that many will never be able to go public again.”

But at RightStart.com, Welch is confident the company will eventually become public. And so are its investors.

Jim Gower, general partner with Palomar Ventures, an $80-million venture fund in Santa Monica that invested, along with Sierra Ventures in Silicon Valley, in RightStart’s $15-million venture round, is upbeat. He said the two venture firms are arranging more financing to keep the company growing.

“We believe the market will respond well when we come back and get an audience,” said Gower, a longtime venture investor.

Still, Gower acknowledges that times have changed dramatically from a year ago.

“I don’t think RightStart.com will be allowed to fail; they have a good business here. But it is difficult to raise capital now.”

Despite the tougher climate, many Southern California companies are still getting venture rounds, of course, and continuing with plans to go public one day.

HomePage.com, which helps build Web pages for businesses, is expected to announce today that it has raised $48 million in a fourth round of venture capital. The company, incubated in Bill Gross’ Pasadena-based Idealab, will announce that Idealab is leading its venture round. Other investors include Jump Investors, a Los Angeles group led by Randall Kaplan and Moore Capital Management.

The financing will be used as a “war chest” for growth, including international expansion, and for acquisitions, said Tim Cahill, chief executive at HomePage.com, which has about 130 employees.

The financing, expected to be the final private round for the company, is expected to last until HomePage.com breaks even in the latter half of 2001, Cahill said. The earliest the company could go public is in the second half of this year.

“We intend to preserve and guard” the bulk of this money, rather than embark on an expensive advertising campaign, he said. “We’re not going to blow it.”

HomePage contracts with companies such as Fox Entertainment to offer their clients free Web pages. To build a customer base, HomePage.com is attempting to attract corporate clients that won’t be vulnerable to market downturns. HomePage makes its money from advertising revenue-sharing agreements and from corporate clients who want to offer customers special features.

“We are reducing our ‘dot-com’ exposure,” and moving to contract with larger, established firms, Cahill said.

“We are going to be careful. We acknowledge that some dot-coms--we hope not ours--won’t make it.”

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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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No Deal

An increasing number of California companies have postponed or pulled plans for first-time stock sales in recent months, mostly because of stock market volatility. Here is a sampling of the state’s initial public offerings, or IPOs, shelved or delayed:

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Amount, Date Company City in millions postponed HOB Entertainment Hollywood $100 6/6 SkyStream Networks Mountain View NA 6/2 2Bridge San Francisco NA 6/1 Ipass Redwood Shores NA 5/31 More.com San Francisco NA 5/25 Noosh Palo Alto 48 5/23 Cruel World Palo Alto NA 5/21 Intra Pleasanton NA 5/19 Rightstart.com Westlake Village NA 5/19 Nexgenix Irvine NA 5/17 Realnames San Carlos NA 5/10 Annuncio Software Mountain View 40 5/5 Beatnik San Mateo NA 5/1 Linuxcare San Francisco 63 5/1 Virage San Mateo 39 4/28 Inventa Technologies Redwood Shores 39 4/27 Dovebid Foster City NA 4/26 PacketVideo San Diego NA 4/25 Embark.com San Francisco NA 4/21 Rigel Pharmaceuticals South S.F. 99 4/13 DrugAbuse Sciences Menlo Park 56 4/10 Intershop Communications San Francisco 223 4/10 Lynx Therapeutics Hayward 99 3/30 Digital Entertainment Santa Monica NA 2/10

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NA: Not available. Deal total may not have been formalized.

Source: Thomson Financial/Securities Data