Last week I Chaired a Panel session at the Reverse Merger 2007 Conference in San Francisco.
Picture the scene - around 200 bankers, attorneys and other professional advisors spending 48 hours and a bunch of dollars exploring ways to take companies public without going through a straight IPO.
A sort of mass Nasdaq/SEC Escape Committee.
In a set of discussions that would have seemed more at home in a chapter of Alice In Wonderland, experts explained how to pick your way through the minefield created by the Four Horsemen of the Apocalypse - the SEC, SarBox, Nasdaq’s disinterest in small companies and the constant threat of litigation from just about everywhere.
I introduced our session – my co-panellists were Ken Koch of Mintz Levin Cohn Ferris Glovsky and Popeo and Gary Benton of Pillsbury Winthrop Shaw Pittman – by relating a story of my childhood.
Back in the early 60s when UK TV was limited to 2 really weedy B&W channels and the bad boys of pop music had names like Burt Bacharach and Mantovani we had to make our own entertainment.
At the forefront of bright young adolescent boys’ healthier attempts to occupy themselves was chess – the game of Kings. We played it often at school, both amicably and fiercely competitively. One day a new version hit the classroom and quickly established itself as the 1960s equivalent of Doom or Tomb Raider.
I can’t remember what its name was but, for reasons that will hopefully become apparent, I’ll call it 2.5D Chess.
The principle was simple. You set up the pieces on a board (A) as normal and placed a completely empty board (B) beside it.
It gets a little harder in a moment and so you might want to click the slide below to understand this graphically.
The games commenced as usual on Board A and play continued until a piece was taken, which triggered the unique characteristics of 2.5D Chess. Although the taken piece was consigned to the box as in the normal game, the taker moved to the destination square on the other board.
See the fate of the pawn and knight below.
When it was his turn (I attended a boys-only school) the next player decided on which board to make his move with the metaphysical transportation rules applying in reverse.
This second life opened up all kinds of exciting possibilities for the game – for example you could escape from what would ordinarily be checkmate simply by taking the attacking piece and transporting your King to the other board – subject only to not landing in check on the destination square. After only a couple of moves, the sheer enormity of the games’ possibilities became evident.
Why did I tell this story at the Reverse Merger Conference? What relevance could it possibly have to listing tech companies on the world’s capital markets?
The answer lies in the longevity of 2.5D’s appeal. About three weeks after the birth of the fever, all of we massively enthusiastic players simultaneously lost interest for all time and returned to the traditional game.
Why?
Simple – because we had come to the spontaneous collective realisation that playing normal chess and getting your opponent into checkmate was already damned difficult enough without adding needless layers of complexity to achieve the same objective.
And it’s the same with running businesses – it’s already hard enough to steer a growing company through the rapids of an IPO en route to becoming a global leader in your market, without having to add the value-sapping activities that accompany a SPAC, a super-SPAC, an AIMSPAC, a reverse merger, a PIPE, a clean reverse merger, a super-SPAC up a PIPE with a clean reverse and all the fixins, or any of the other exotic mechanisms explored during my two days in San Francisco’s Four Seasons.
That being said, the 2-days contortionistfest wasn’t wholly a waste of time. Amongst the complex gaming that characterized most of the material, there was one spectacularly illuminating presentation.
Brian Cooke of Keating Investments LLC, New York gave what qualifies as one of the best slides I have ever seen in a lifetime of enduring other peoples’ presentations- a lifetime that stretches back to the days of handwritten overhead foils.
Brian’s underlying point lays bare something that is screamingly obvious to any leader of a growing US VC-backed tech company today – namely that they aren’t going anywhere.
But unlike those who merely rant about the subject and wail about their misfortune – Brian analyses unimpeachable data to show the magnitude of their problem – and it’s very, very big.
His algebra is seductively simple. Calculate the size of the inventory of VC-backed companies, divide it by the current rate of exits – trade sales and Nasdaq IPOs – and the result is the time that it will take before all of today’s VC-backed companies can expect to escape from private hands.
Namely the length of the sentence that will see them starved of development capital and handicapped by a preference share structure that is guaranteed to piss off everybody involved.
I include the slide below, but to spare you the effort of double clicking, the answer is TWELVE YEARS!
So, if you assume a constant stream of escaping companies, the average time that each can expect to wait before either being sold or floated is SIX YEARS.
Or put more simply if you are normal you can expect to stay trapped in the status quo until some time in 2013.
So now you know.
And to test just how awful that prospect is if you are a tech company leader, rehearse the following speech on your way home tonight:
“Honey, I’ve got some bad news. You know how hard I’ve worked over the last [3, 4, 5, 6, 7, 8 – Delete as necessary] years, staying out late, skimping vacations, sharing my pain with you and the children? And you also know that the reason I did it was because I totally believe in my company and its potential to achieve global domination in our sector thus showering me with fame and us with riches beyond imagination. And you know how my CFO and VCs have always said that we were just [3 – 6, 6 – 12, 12- 18 – Delete as necessary] months away from an exit and that all we had to do was to wait for Nasdaq to open up a little? Well I’ve just discovered that I’m going to have to hunker down for a little longer. How long? Oh it definitely won’t be more than twelve years and hopefully it will only be [3,4,5,6,7,8,9,10,11 – Delete as necessary].”
Apropos of "Planning to Stay on the Shelf..." it would seem that what I shall call "American shelf IPO disease" has spread to the entire US corporate economy.
I commend to all of the followers of AIM4TECH, for two reasons, a story by Michael J. de la Merced in The New York Times dated Sunday, July 15, 2007 (today as I write this) -- under the headline: "An I.P.O. Glut Just Waiting to Happen."
The main premise is that when the recent glut of going-private events are ready to be brought back to the market as going-public events, the sheer volume will crash share prices. Thus, we have one more reason to forget about doing an IPO in New York. (Apparently, nobody wants to talk about the fact that the US earnings-per-share growth figures for the first and second quarters in the US are fake. They reflect the use of huge amounts of debt to reduce the NUMBER of shares. Adjusted for buybacks, actual EPS has been deteriorating for two quarters. And leverage ratios are "going to hell in handbasket." But that's an argument for another day.)
You have to register with The New York Times to read its stories but registration is free. With any luck, the link below will take you to the story:
http://www.nytimes.com/2007/07/15/business/yourmoney/15deal.html?ex=1185163200&en=433ea80454b85bb7&ei=5070&emc=eta1
BUSINESS / YOUR MONEY | July 15, 2007
An I.P.O. Glut Just Waiting to Happen
By MICHAEL J. de la MERCED
A flood of public companies have gone private over the last two years. What happens when they go public again?
**********************************
If you don't have time for the whole story, let me share with you the delightfully entertaining part in which the US equity markets are described as "a casino."
"Before, I.P.O.'s were kind of the only game in town," said Robert A. Profusek, the head of the mergers-and-acquisitions practice at Jones Day, the law firm. "Today, it's more like a casino in terms of the number of games available."
******************************
Wishing everyone a one-day-late Happy Bastille Day:
I remain your not-particularly-humble servant,
-- REG CROWDER
www.MediaBistro.com/RegCrowder
Posted by: REG CROWDER | July 15, 2007 at 10:08 AM