CurrentOfferings.com Story:

Nanosys Pulls IPO, Putting Nanotech Revolution on Hold

By Antonio Regalado and Raymond Hennessey, WSJ, Aug. 5, 2004

The nanotech IPO boom looks as if it will have to wait.

Yesterday, Nanosys Inc. withdrew its initial public offering that was seeking to raise $100 million. The decision damps expectations for a Wall Street rush to cash in on nanotechnology, a new approach in manufacturing that involves ultrasmall materials and electronic devices.

The abrupt withdrawal of the IPO, which was to be led by Merrill Lynch & Co. and Lehman Brothers Holdings Inc., could make it tougher to take other nanotechnology companies public. Several firms, including Nanofilm Ltd., had been hoping the Nanosys IPO would signal strong interest from investors.

"It's not a good sign," said Tom Taulli, manager of the Oceanus Value Fund, a hedge fund in Newport Beach, Calif. "If this company couldn't make it, no one else can."

The Palo Alto, Calif., company's futuristic technology had rated mixed reviews ahead of its planned offering. Although some investors have been in a swoon over nanotechnology, Nanosys has drawn criticism for trying to go public without any profits and vague product plans.

In the end, positive sentiment about nanotechnology's first pure-play IPO wasn't enough to interest large institutional investors, Mr. Taulli said. Bankers close to the deal confirmed demand for the issue was weak.

Still, Nanosys' withdrawal may say less about nanotechnology than it does about investors' wariness concerning development-stage companies. Several biotechnology companies, which also have limited sales and mounting losses, have been able to price deals, but only after taking substantial price cuts to stimulate investor demand.

Overall, the IPO market has been edgy. More than half the companies than went public in July, for instance, were forced to sell their shares below expectations, according to data from Thomson Financial in New York. As such, Nanosys' pullout "is less an indictment of nanotechnology, than a sign of how tough it is for any company in an early stage of development right now," said Joe Hammer, head of capital markets at Adams, Harkness & Hill in Boston.

Nanosys was trying to sell 6.25 million shares at $15 to $17 a share. Based on the midpoint of that range, and the 21.9 million shares the company would have outstanding after the deal, the IPO was valuing Nanosys at $350.4 million, or more than 100 times last year's revenue of $3 million. Revenue doubled in the first six months of this year, to $2.5 million, from $1.2 million in the year-earlier period, but the possibility of profits remains far off.

Another company that has been named as a hot IPO prospect is Nano-Tex LLC, a division of International Textile Group of Greensboro, N.C. The company's chemistry is used in Dockers pants and other apparel to make them water-resistant. Nano-Tex Chief Executive Donn Tice says his company doesn't have firm plans to go public, but he believes the market would be receptive to a company with growing product revenue.

The Nanosys offering had made headlines after Vinod Khosla, a partner at venture-capital firm Kleiner Perkins Caufield & Byers, was quoted as saying he feared nanotechnology was turning into an Internet-style bubble, and that the Nanosys offering could "defraud" investors. Mr. Khosla later backed away from his remarks, saying he was referring to the industry generally, not a specific company. But the damage was done, drawing attention to the lack of product details in Nanosys' registration filing.

Still, Nanosys had piqued nanotechnology interest on Wall Street. The company's roadshow encouraged some investors that nanotechnology is a field with major potential. Company Chairman Lawrence Bock's PowerPoint presentations included ideas for products that could revolutionize several different industries, including energy and computing.

The company marketed itself mainly on the strength of a big portfolio of patents licensed from universities. Mr. Bock, a venture capitalist, had early on signed up big-name professors at Harvard University and other schools and acquired rights to inventions from those labs.

Nanosys investors included many key promoters of nanotechnology, such as Harris & Harris Group Inc., whose stock was down 9% yesterday. Other investors include Lux Capital, which co-publishes with Forbes Inc. the Forbes/Wolfe Nanotech Report, a publication that markets nanotechnology stocks to investors.

Some people familiar with the IPO also questioned whether Merrill had pushed the deal too aggressively. The securities firm has been trying to get out front on nanotechnology, launching a nanotech stock index earlier this year. A Merrill spokesman declined to comment.

Nanotechnology remains difficult to define, causing additional uncertainties for investors. Typically, the term refers to man-made structures less than 100-billionths of a meter in size that have special electronic or structural properties. But some companies have used the nanotechnology label to hype unrelated products, while many real advances are occurring inside big companies, such as Intel, where the developments have only a modest impact on stock prices. The Nanosys offering would have given investors their first chance to invest directly in some of the most promising aspects of nanotechnology.

Other companies angling to cash in on the nanotechnology buzz expressed disappointment that the offering had been withdrawn. "It's not good news for the industry, particularly given their publicity and their patent portfolio," said CEO Scott Rickert of Nanofilm, a company that sells chemical films to protect eyeglasses with revenue of about $15 million.

After Nanosys' IPO registration, Nanofilm became one of several small private firms courted by bankers. Mr. Rickert thinks his firm's IPO prospects remain strong. "We still have a lot of interest from the Street."

TOM TAULLI, a principal at the Oceanus Value Fund, is a co-founder of Current Offerings.