CurrentOfferings.com Story:

IPOs often springboard to M&A;

By Cheryl Meyer, The Deal, May 24, 2004

Although initial public offerings are on the rise this year, market volatility and a renewed skepticism toward operating as a public concern are driving several companies to seek exits through mergers or acquisitions.

Take Brightmail Inc., a San Francisco maker of anti-spam software that agreed to a $370 million offer from Symantec Corp. after filing for an IPO in March. Brightmail CEO Enrique Salem said joining a bigger company would widen Brightmail's distribution channels, a common rationale for second-tier tech providers that agree to sell.

Expect more of the same, bankers said. "Nobody files to go public and plans for an M&A; transaction," said Karl Will, managing director and head of tech M&A; at J.P. Morgan Chase & Co., which advised Brightmail on its deal. "I believe we are going to see a series of these types of transactions where companies that were on a road to an IPO end up electing to go down an M&A; route."

Some companies cancel plans to go public to capitalize on a consolidation wave that puts a premium on their products and services. For example, after several major rivals were purchased in lucrative deals, Intelsat Ltd. on May 21 pulled its IPO and hired Morgan Stanley and Merrill Lynch & Co. to shop the Bermuda-based satellite services company.

Athletic-shoe company Converse Inc. last year yanked its IPO in favor of a $305 million buyout from Nike Inc., and intelligence software company Crystal Decisions Inc. nixed its offering for an $820 million sale to Paris-based Business Objects SA.

Others, such as Changepoint Corp., are hangovers from the tech boom, when IPOs were seen as a speedy and profitable off-ramp. The IT automation software company filed for an IPO in early 2000, just before the economy tanked. In April it agreed to sell out to Compuware Corp. of Detroit for $100 million in cash.

Daniel Winnike, a partner at law firm Fenwick & West LLP who advised Symantec on the Brightmail deal, said IPOs are costly and distracting. "It would be an ambitious bet that you could gear up for that whole IPO process primarily to use it as a wedge for valuation," he said.

But Brooks Dexter, senior managing director at Santa Monica, Calif., investment bank USBX Advisory Services LLC, said that for startups an IPO filing can be useful in valuing the company. Also, putting a company on the path to going public can encourage shareholders to consider M&A; as an alternative exit strategy.

"You have a lot of companies hoping to get public but a market that is more selective today than it was when the last IPO window was open," he said.

Companies sometimes file for an IPO to attract the interest of potential buyers or to draw a better takeout price. Sources believe Brightmail rebuffed several offers from Symantec over the years before finally consenting to a sale.

"Once a company is in play or proceeding with another course of action, that can make them more of an attractive candidate," said Gregg Moskowitz, an analyst at Susquehanna Financial Group LLLP in New York. "It creates a sense of urgency for companies that are evaluating it."

But Steve Cullen, senior vice president of security products and solutions at Symantec, said the merger was more a product of industry currents. Corporate customers want to buy a range of security technology from a single supplier, he said, requiring providers such as Symantec to scale up.

"The customer demand to deal with fewer vendors is going to drive consolidation," he said, adding that the ability to bring products to market swiftly is especially important for security software makers.

For Brightmail and other small companies, another factor weighing against going public is the difficulty of diversifying product lines and growing organically. "Long term it's a tough proposition," said Tom Taulli, co-founder of Current Offerings Inc., an online research site. "Brightmail is a one-product, one-pony show � what do you do for an encore?"