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The Wall Street Journal – Pitfalls on Road to IPO Riches

By Lynn Cowan –

As a businessman who founded and sold one technology company, then headed another, Frank Fawzi believed he could solve almost any problem. That was before he entered the IPO market, attempting to take his company public.

As he and other executives have learned on the IPO trail this year, the process isn’t always easy—or successful—even in buoyant markets.

“IPOs are one of those things that are not in your control” after companies start marketing the stock to potential investors, says Mr. Fawzi, chief executive at IntelePeer Inc., a telecom-services provider based in San Mateo, Calif. “CEOs think we can fix anything. This was the first time I felt that I couldn’t fix something.”

With the pace of initial public offerings in the U.S. picking up in recent months, more companies are hoping for the iconic post-IPO bounce—and the riches that follow for their founders, investors and employees. The biggest so far this year is expected to be this week’s up-to-$763 million offering by Carlyle Group L.P., which will likely be quickly eclipsed in coming months by the Facebook Inc. debut.

But amid the IPO-preparation excitement, companies also face the very real prospect that their coming-out parties will fall flat.

Six deals ended up getting postponed or withdrawn during March, even as pricing and performance for IPOs began improving. Seven more were pulled in April, with the companies again citing market-related reasons, according to Dealogic. The latest example was biofuel company Enerkem Inc., which withdrew its $138 million deal after attempting to price it throughout most of April.

In the last six years, the proportion of deals pulled compared with the number filed has fluctuated; it was as low as 21% in 2006 and 2007, when IPOs were thriving, but widened considerably in 2008, when the IPO market was barely functioning, says Dealogic.

The reasons deals don’t work out are varied—and often not even related to the quality of the business.

“That unknowability of how a deal will turn out is unbelievably taxing,” says Sam Schwerin, a co-founder of venture capital firm Millennium Technology Value Partners.

Mr. Fawzi, 50, and his fellow executives at IntelePeer endured a whirlwind two weeks in January, crossing the country from San Francisco to New York City to meet with large investors and host so-called roadshow meetings for 70 or more potential buyers at a time.

It wasn’t uncommon for him to have seven meetings a day, telling the story of his company’s business plan and financial performance. At first, the feedback seemed positive, said Mr. Fawzi. But toward the end of the first week, he sensed sentiment shifting. He heard concerns that the company’s business story was complicated, it wasn’t a consumer brand, and it wasn’t profitable. What followed, he said, was “the longest week of my life.”

“Once you’ve lost momentum, it’s very hard to turn things around,” as word spreads through the investor community that buyers aren’t lining up, says Mr. Fawzi. He felt investors and the media didn’t look closely enough at the company’s financial statements. IntelePeer ultimately withdrew its IPO and Mr. Fawzi flew back to his home in Florida.

Meanwhile, just as IntelePeer’s IPO plan was falling through, the roadshow for another tech deal—computer-security-software maker AVG Technologies N.V.—was in full swing. Chief Executive J.R. Smith, 47, was going through a blur of investor meetings; in one instance, he visited Milan, Frankfurt and London in a day.

The shares for AVG, which is based in Amsterdam, were priced within the expected range on Feb. 1, and began trading the next day—only to flop, declining 19% on its debut. The stock on Monday closed at $13.84, 13.4% below its IPO price.

“The biggest surprise for me was that we came out with a price of $16, and suddenly, when it started trading, the price became $13.50,” says Mr. Smith. “What had changed? Weren’t we the same company last night, when people were willing to buy it at $16?”

At least part of the responsibility when deals go wrong falls on the underwriters, who earn millions to advise companies on pricing, timing and selling deals to investors. The banks typically get a percentage of the offering.


Spokespeople for the lead underwriters on IntelePeer’s deal, J.P. Morgan Chase & Co., Deutsche Bank AG, and Barclays, declined to comment. Spokespeople for AVG’s lead underwriters, Morgan Stanley, J.P. Morgan and Goldman Sachs Group Inc. also declined to comment.

Several bankers said that the IPO process is a cooperative effort between banks and company executives, with the companies having the last say on whether to accept a lower valuation or shelve the deal.

“It’s ultimately correct that bankers are supposed to be bringing their capital market expertise to the table, on the one hand,” said Scott Rostan, a former Merrill Lynch investment banker and founder of Training the Street, which trains junior professionals at investment banks. “But it’s nearly impossible to time the market. If they could, then every deal would work.”

Messrs. Fawzi and Smith said they didn’t blame their bankers for the way their deals ended.

The morning after the end of their respective roadshows couldn’t have been more different for the two men. Mr. Fawzi said he spent a day at home thinking about why the IPO hadn’t worked and what he and his company could do better.

“Candidly, on a business level, this was absolutely the worst setback I ever had in my career,” said Mr. Fawzi.

Mr. Smith rang the bell at the NYSE on the day AVG Technologies’ stock launched. His 1.2 million shares, which are subject to a six-month lockup period in which he can’t sell them, are today worth about $17.7 million. After the IPO, he says, he treated himself to a 1968 Gibson acoustic guitar and took his wife shopping.