Posted: October 31, 2009
Alt-energy companies buoyed by public bucks
Sometimes IPOs are the only answer -- and the best oneGreg Pfahl
The winds are turning favorable for alternative energy companies to seek financing from the public markets. And although going public isn't for everyone, it's hard to ignore the capital that is becoming available.
For whatever reason - anticipated turnaround in the economy, loads of cash sitting on the sidelines, endowment funds looking to make up for the losses of 2008 or the potential for higher energy prices - money is starting to pour into the market in general, and alternative energy companies in particular. It's not a windfall of money yet, but recent financings have piqued interest in alternatives.
In September, A123 Systems Inc., a Watertown, Mass. manufacturer of electric car batteries that is not profitable, filed papers to raise $175 million in an initial public offering. The shares were bid heavily the first day of trading and the company ended up with $380 million as shares went for $13.50 the first day and then nearly doubled in price the next day.
It was the biggest IPO in the green field since 2006 and has the whole industry excited over who will be next to take public investor cash. The raise followed earlier successful initial public offerings of San Francisco-based OpenTable Inc. and SolarWinds Inc. in Austin, Texas.
A lot of people see this industry as a fad or bubble like technology and telecom. The recent financings lend a bit of credibility to the argument that alternative or green technology is still out there and there's money willing to flow into the sector.
The decision to go public
Ideally you'd like to tap the public markets with solid multi-million revenues, great technology, big back orders and a terrific, experienced management team. That's not always the case for companies going public, especially in stronger markets.
A123 Systems had recently lost the battery contract for the Chevy Volt hybrid, although it does have agreements in place to supply batteries for use in other major automobile makers' vehicles. The success of their recent offering can be partially attributed to two factors, 1) projected future demand related to electric vehicles, and 2) the recent awarding of significant government incentives.
If your company has great technology, you can't stick your head in the sand regarding financing. One of the drivers right now is there just aren't a lot of options. Venture capital funding is at a 15-year low. Angel or other early stage financing doesn't provide much money.
Private equity is yet to be seen in this market, except for more-established companies and component suppliers, and a bank is not going to finance many of these companies. Most green companies don't fit the bank model. There's little to no revenue stream and if there are hard assets, they're just too early stage and too risky for banks.
We may reach a point where traditional bank financing is a viable alternative. The Department of Energy's loan guarantee program is active. Most government funding sources will require some level of matching investments, which may lead to another incentive to look to the public markets.
In looking at the traditional life cycle of a venture capital backed company, there have been two traditional exit plans for the venture capitalists: a public offering or a merger or acquisition of the company. The M&A option is worse for the economy due to lost jobs and other factors, and greater value is generally obtained through a public offering. But over the past 10 years, the trend for venture backed exit plans has overwhelmingly gone towards mergers and acquisition.
According to the National Venture Capital Association, these are the top three barriers to companies going public:
• Compliance requirements (Sarbanes-Oxley, audit, governance)
• Increased volatility in public markets
• M&A as a better alternative (faster and more liquid)
Whether these factors are merely a paradigm versus reality is debatable, but they should be considered in determining the direction of your company.
Make a group decision with your advisors
I'm not going to tell you going public is the way to go, nor that the recent activity in the public markets is a sign that the markets are recovered. It is an option based on a conversation with the board and your investment bankers.
There are high costs associated with public companies. It shouldn't be your last option, but in a lot of cases - it is the best and potentially only option.
Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Orange County. He specializes in financial reporting for complex transactions, including initial public offerings (IPOs), private offerings, and mergers and acquisitions, and serves as a local leader for the firm’s alternative energy practice area. Greg Pfahl can be reached at firstname.lastname@example.org or 303.298.9600.