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The Globe and Mail

IPOs lose their appeal in unpredictable market

Skiers and snowboarders run down to Whistler Village ski resort on February 6, 2010.

For many Canadian executives and entrepreneurs, trading on the public market means achieving a financial goal - whether it's an acquisition, expansion or paying off debt. It often also provides owners and investors with an opportunity to cash out.

But going public has lost much of its appeal in the last two years, as the recession created a volatile and illiquid market that meant businesses couldn't get the same value that they could in previous years.

In 2008, IPOs saw a mere $682-million in total dollar value for all offerings made, compared with $3.5-billion in 2007, according to PricewaterhouseCooper's Canadian IPO Survey. The following year was a little healthier, reaching $1.82-billion. But four of the IPOs issued in 2009 accounted for 96 per cent of those funds, including Genworth MI Canada Inc. and Capital Power Corp.'s sizable offerings ($850-million and $500-million, respectively).

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This year, companies have continued to face tough challenges in their efforts to go public. Most recently, the price of shares in Whistler Blackcomb Holdings Inc. dropped from to $12 from $15 in a deal scheduled to close Nov. 9. Lawrence Wilder, a securities lawyer with Cassels, Brock and Blackwell, said the sale will serve as an exit for private equity firm Fortress Investment Group, which owns Intrawest ULC, the ski resort's parent company.

Two weeks ago, SNC-Lavalin Group Inc. withdrew its IPO for TransAxio Highway Concession Inc., which operates Highway 407, a toll highway, in Ontario. Pierre Duhaime, president and CEO of SNC-Lavalin, cited poor market conditions.

Despite the uncertainty, the IPO market has continued to grow beyond last year's numbers. The TMX Group reported that between January and September of 2010, 80 IPOs (including exchange traded funds and other structured products) were issued on the TSX, raising $6.27-billion in financing. Compare that to just 36 offerings, which raised $2.9-billion, for the same time period a year earlier.

"Certainly, general economic conditions have played a role in the upswing of new listings," said Ungad Chadda, the senior vice-president of the Toronto Stock Exchange. "Valuations and liquidity have improved dramatically compared to last year, so companies have been coming to market to take advantage of that."

The process of going public can be a long one, which adds to the difficulty of predicting how the stock market will receive it. It can take as little as six months for companies whose financial statements, intellectual property and employee contracts are up to snuff, but most take about a year, said Roman Dubczak, the head of equity capital markets at the Canadian Imperial Bank of Commerce.

Once the underwriters - who price, buy and sell the shares - are on board, a company's managers will assemble a team of lawyers and auditors. A thorough review of the company's operations and three years of financial statements are crucial to gaining the confidence of investors and the regulatory securities commission. The more organized a company is, the more time and money they'll save in the long run.

"Some companies are incredibly well-prepared and come to you with detailed business plans and all of their affairs in order," Mr. Wilder said. "That's an easy one, and consequently the cost is typically less. Most companies don't fall into that category."

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The auditors, lawyers and underwriters work together to write the preliminary prospectus, the marketing document that tells the company's story and its goals. Due diligence on this document is key, said Mr. Wilder. It could be subject to a number of revisions before it is finalized, with each session running between $200,000 and $500,000 in legal fees alone, he said. The company also has to apply to be placed on the appropriate stock exchange listing, and the securities commission (administrated provincially) requires a comprehensive regulatory review.

The management team will then embark on an intensive road show, typically spending three days in Toronto and a day each in Montreal, Vancouver, Winnipeg, Calgary, said Mr. Dubczak. Management will do seven or eight presentations each day, in the hopes of drumming up interest from institutional and retail investors. With many managers of Canadian assets in the U.S., it's also common to visit New York, Boston or Baltimore. It can be an exhausting process, Mr. Dubczak said.

"The more confrontational the meeting with the portfolio manager," he said, "the more it actually means that they've read [the prospectus] are passionate about it, and really want to push you to see if they want to get involved."

The underwriters, who take on the risk of the sale and who are paid a commission based on the success of the IPO, keep a record of investor interest. They keep track of the number of shares investors are interested in and at what price.

"There's a price discovery that takes place over the marketing period," said Peter Miller, the head of equity capital markets at BMO. "The very last day we'll sit with the company, and we'll say, 'You hit your target. We have a book that looks like it's shaping up at this price. So we have a deal for you.'"

But there's a chance that investors aren't sufficiently interested to meet the suggested price. Many companies have withdrawn offerings at this point. An entrepreneur or investor who is pursuing an IPO as an exit strategy may want to wait until conditions improve.

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"They might say, 'You know, I'm better off working another three or four years, making the money I'm making - which is good money - and hoping that in that period of time, the markets turn around and I get a better valuation,'" said Allan Bronstein, who specializes in corporate finance at Toronto-based Torkin Manes LLP.

While the market may be unstable, there are many other factors that business owners will consider when thinking about going public as an exit strategy. Stay tuned until Thursday to discover the pros and cons of an IPO, why shareholders may have to wait until a secondary offering to cash in and the three must-haves a company will need to ensure they get it right.

Where the action is

Canadian activity in the TSX and the TSXV is largely concentrated in the mining, energy and real estate sectors, and results have been mixed. Athabasca Oil Sands Corp. sold at $18 per share when it went public in April, but is now trading at just under $12. The few IPOs outside of the resource industries have seen some positive results. Leisureworld Senior Care, a chain of retirement homes, raised $190-million through its March IPO, to buy 95 per cent of its ownership interest from Macquarie Long Term Care.

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